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The year 2024 might seem confusing for new investors. You have the money, you've made a plan, and you've done your homework. But there's one big concern: Interest rates are higher now compared to the historically low rates we had before 2022.
If you've looked into investment financing, you know that investors often pay higher mortgage interest rates than regular homebuyers (usually between 0.75% and 1.5% higher). Currently, with regular mortgage rates just under 7%, this can be daunting.
You might think it's wise to wait for the expected rate cuts, which many real estate experts predict will start in the summer of 2024. But what if we told you that waiting might not be the best idea, even with current rates? What if we said that mortgage rates don’t have as big an impact when you're investing in real estate?
Here are five reasons why:
1. Mortgage Rates Now Don’t Reflect the Loan's Value Over Time
When you get a mortgage for your investment property, consider this: Will the loan amount be the same in a year? How about in five, 10, or 15 years?
The answer is no. Inflation means the dollar's value decreases over time. So, the money you borrow in 2024 will be worth less as time passes. There are online tools, like the QJO Investment Tool, that can show you the true value of your mortgage over a fixed 30-year term. You'll be surprised.
Seeing that your mortgage decreases over time (unlike your investment property's value) makes current interest rates less worrying. That 8% rate won’t seem as big a deal after five years.
And we're not even talking about property appreciation yet; just the loan's gradual devaluation.
2. Real Estate Investing Pays Off in the Long Term
Real estate investing is about the long haul. Even if you plan to flip and sell properties, it’s not a get-rich-quick scheme.
Real estate appreciates over time. You have a tenant paying your interest and loan. Eventually, you sell for a profit. It’s straightforward. Even if home values drop in the future, they're so high now that, barring a major event, real estate will likely remain a profitable investment.
The goal isn't to pay off the mortgage quickly, like with your own home. You want a long-term commitment for maximum resale value.
U.S. properties consistently increase in value each year. Depending on your investment location, home values are still rising by up to 9%.
A difference in interest rates of 0.25% to 1% might only mean $10 more per month, depending on your loan. That's insignificant compared to the profit from appreciation. And as your rental property value rises, so does your rental income.
3. No Guarantee Rates Will Drop Significantly This Year
If you’re waiting for rates to return to the sweet 4% pre-2022, you might wait a long time. While rates are expected to decrease in 2024, it might only be a small cut. Most economists predict rates won't dip below 6% before 2025.
Consider the months you could earn rental income, build equity, and repay the loan. The sooner you buy, the sooner you can sell for a profit and diversify your portfolio.
4. When Rates Drop, You’ll Compete with Regular Homebuyers
Currently, home sales are at a 28-year low. This is good news for investors. There are properties on the market, but fewer buyers. Why? They're waiting for rates to drop. If you can invest now, you'll have less competition for affordable properties compared to when buyers flood the market.
5. Higher Rates Might Help with Taxes
Remember, as an investor, you need to think differently than a homeowner.
For homeowners, higher rates mean more interest eating into their earnings. But for investors, mortgage interest is tax-deductible on rental income. Higher interest rates could provide better cash flow through tax deductions.
In Conclusion
Mortgage rates will impact you differently based on your down payment and the local real estate market.
If you're unsure how much rates should factor into a deal, talk to Ridge Lending Group. We offer various loan options for property purchases, whether for personal use or investment. We're dedicated to our clients' success and provide free education to support their financial freedom.