The year 2024 can feel like a confusing space to inhabit for rookie investors. You have the cash, you have the plan, and you've done your research. There remains one big issue: Interest rates that are currently much higher than the historically low rates we had pre-2022.
If you've done your research into investment financing, you know that investors pay even higher mortgage interest than regular homebuyers (typically between 0.75% and 1.5% higher). Right now, that is a daunting prospect, with regular mortgage rates still hovering just under 7%.
It may seem like a prudent choice to wait until the much-promised rate cuts, which many real estate experts predict will begin sometime in the summer of 2024 onward. But what if we told you that waiting is a bad idea despite current rates? Moreover, what if we told you that mortgage rates don't matter all that much if you're investing in real estate?
Here are five main reasons why.
When you take out a mortgage on your investment property, ask yourself: Will your mortgage loan be worth the same in a year? How about in five, 10, or 15 years?
The answer is a definite no. Inflation inevitably means that the dollar devalues over time, so the amount of money you borrow in 2024 will actually be worth less as time goes on. There are online tools and apps that can help you calculate the true value of your mortgage loan over the fixed 30-year term (QJO Investment Tool is one and will tell you how much you will actually pay over time). Trust us, you'll be surprised.
When you see that your mortgage loan depreciates over time (unlike the value of your investment property), you will start to worry less about current interest rates. That seemingly horrendous current 8% just won't be that big a deal once you're past the five-year mark.
And we haven't even touched on property appreciation yet. We're just talking about the gradual devaluation of the loan.
Real estate investing is all about playing the long game. Even if you're planning on flipping and selling properties, we're still not talking about a get-rich-in-a-week scheme.
The fundamental fact that makes real estate a great investment is that it appreciates over time.
You have a tenant repaying your interest and your loan. Eventually, you sell at a profit. It's as simple as that. Even if home values begin going down in the coming years, they are so high at the moment that, short of a catastrophic event, real estate will continue to be a profitable investment for the foreseeable future.
The idea here is not to repay the mortgage as quickly as possible, which is what you would want with your own home. You want the opposite: a long-term commitment and the maximum resale value.
U.S. properties are consistently growing in value year over year. Depending on where you've invested, home values are still going up by as much as 9%.
The mortgage interest really can't trump that. An interest rate difference between 0.25% and 1% can work out to be as little as $10 per month, depending on the type and value of your loan. That is vastly insignificant in comparison with the final profit you will make due to appreciation. And don't forget that as your rental property appreciates, your rental income will appreciate, too.
If you're waiting for interest rates to go back down to the sweet 4% they were pre-2022, you might be waiting a very long time. While rates are widely predicted to come down at some point in 2024, this could mean only a modest cut. The likelihood of rates reducing below 6% before the end of the year remains low.
In fact,most economists thinkrates won't go below 6% before 2025.This is in line with what historically has tended to happen to rates: They go down much slower than they go up.
Think about all the months you could be getting rental revenue from your investment while building equity and having that loan repaid. Moreover, the sooner you buy your first investment property, the sooner you'll be able to sell at a profit and diversify your portfolio by buying other properties.
Right now, home sales activity is at a 28-year low. That's actually pretty good news for an investor. It's not that there aren't any properties on the market; it's just that not as many people are buying.
And why aren't they buying? They're waiting for interest rates to come down. If you can afford to invest in real estate now, you will have far less competition for affordable properties than you will once buyers feel more confident and create a feeding-frenzy environment.
Again, you have to remember here that as an investor, you'll sometimes have to think differently from a homeowner.
From a homeowner's perspective, there's no benefit to higher mortgage rates whatsoever, as the interest just eats further into their earnings. But if you are an investor, the mortgage interest is, in fact, tax-deductible as an expense on your rental income. If you need improved cash flow, those tax deductions from higher interest rates could provide it.
At the end of the day, mortgage rates will affect you differently, depending on how much you're able to put down on your investment property and the local real estate market.
Todd KnudsonReal Estate
ResidentialCommercialInvesting
RE/MAX Southwest
14905 Southwest Freeway, Sugar Land, TX 77478
Cell:713-829-1070
email: Tkrealty10@gmail.com
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