Why Chasing Low Mortgage Rates Doesn’t Really Matter in Real Estate?

Are you fixated on mortgage rates? Many real estate investors get caught up in chasing the lowest interest rates, believing it's the key to profitability. However, in this article, I'll explain why mortgage rates don't really matter as much as you think, especially when playing the long game of real estate investing. I’ll share some important insights to help you think bigger, beyond just the monthly payment. We'll explore inflation, rental income, and long-term wealth building, to demonstrate how a strategic mindset trumps a narrowly focused pursuit of low rates.

Why Chasing Low Mortgage Rates Doesn't Really Matter in Real Estate?

The Big Picture: Beyond the Monthly Payment

It's understandable to be concerned about mortgage rates. They directly impact your monthly payments, and that can feel significant. Higher rates mean less cash flow, right? Well, only in the short term – that's where most people's vision stops, and mine doesn't.

The truth is, obsessing over mortgage rates can make you miss the forest for the trees. As a real estate investor, I’ve learned that other factors – like property appreciation, rental income, tax benefits and good property location – are far more crucial for your overall return on investment (ROI).

A Look Back and Ahead: Understanding Interest Rate Trends

To understand why mortgage rates shouldn't be your primary focus, it's helpful to consider historical trends.

Think back to times when rates were way higher – did that stop people from investing? No.

Here's a bit of historical context to give you a better perspective:

• The Long-Term Average: Since 1971, the average interest rate for a traditional 30-year fixed mortgage has hovered around 7.74%.
• Pre-Quantitative Easing: Before the Federal Reserve started injecting capital into the markets (quantitative easing), the average was even higher, closer to 9.12%.
• The Fed's Influence: Quantitative easing (QE) pushed rates artificially low for a decade, creating a distorted view of what's “normal”. This is why people talk about quantitative tightening (QT) and it's exactly the opposite of quantitative easing.

Ultimately, interest rates are determined by market forces. What really matters is the bigger picture – the underlying fundamentals of a healthy real estate market.

The Power of Inflation: Your Secret Weapon

One of the most overlooked aspects of real estate investing is the impact of inflation. Here's how it works in your favor:

1. Debt Devaluation: As inflation rises, the real value of your fixed-rate mortgage decreases over time. You are paying it off with cheaper dollars!
2. Eroding Debt: Imagine you borrow $200,000 today. In 10 years, that $200,000 debt will be worth less in real terms due to inflation.
3. Assets Appreciate: Real estate, as a tangible asset, tends to appreciate in value during inflationary periods.
4. The Long Game: So, that mortgage payment, that seems big now, becomes a smaller and smaller percentage of your income over time. It’s someone else paining it off for you, in essence.

Illustrative Example:

Let's say you borrow $160,000 at today's rates. Over 30 years, you'll pay back around $400,000 in principal and interest. But, accounting the dollar's eroding value over a period of time, the real value of those payments could be closer to only $152,000 compared to today's money because the bank loses money on you. You WIN!

That's because you are being rewarded with money that loses purchasing power over a period of time, which your tenant is giving you at fair market value.

Rent is the Real Revenue

Now, let's discuss rents. They provide an opportunity to keep it occupied by tenants.

The most critical thing in real estate is the fact that you can raise rents.

Rents have not gone down. There are places where they have declined. So, understand what is driving the community and what will drive tenants to that community.

Rental Income: The Engine of Your Investment

Focusing on a property's potential for rental income is far more crucial than obsessing over the interest rate.

• Cash Flow: Strong rental income ensures positive cash flow, regardless of mortgage rate fluctuations.
• Property Value: High rental demand drives up property values, increasing your equity.
• Flexibility: Positive cash flow provides the flexibility to weather market fluctuations and cover unexpected expenses.

Questions to Ask Yourself:

• Can the property be reasonably rented for the entire time you own it?
• Is there potential to raise rents over time?
• What are the drivers of rental demand in the area?

Putting it All Together: A Simple Calculation

To illustrate the power of long-term thinking, consider this scenario:

1. Purchase: You buy a $200,000 property with a $160,000 mortgage (80% loan-to-value).
2. Mortgage Payoff (Tenant Pays): Divided by 30 years, that amounts to your tenant paying an average of $5,333.34 per year on your behalf.
3. Investment: Consider your initial investment of $40,000 down payment + $10,000 in costs = $50,000.
4. ROI: Now, what will it be? $5,333.34 divided by the $50,000 invested, giving you a 10.6% increase on your investment! Now isn't that great?

This is just by keeping the place occupied, and this doesn't factor in any cash flow, cash-on-cash return, tax benefits, and appreciation!

Appreciation

Let's get into appreciation now.

Properties are still appreciating. The last 100 markets only one of them had a decline, and that was Austin, Texas. But, everywhere else, they are going up.

Calculating ROI from All of This

There are more calculations involved, and each investor has a unique path they are on.

The point of this all is to tell you that don't always only look for the cash on cash because these things are good metrics to focus on, but they come down the road.

• Nobody ever started a business to be profitable after the first month, right?
• They start to make 3-5 years and be profitable for the path. and that's what this should emulate.

Finding the Right Financial Partner

When diving in to property investment, you must seek the right people to help you along the way on both the real estate side and in lending. If you work with the wrong lender, you are taking risk in that case.

There are some good people out there, but they don't get it, period.

Tax Benefits

Don't forget about tax benefits!

The ability to write off interest on your taxes benefits you even when rates are higher. So, don't set cash-on-cash return as a priority.

Factors to Note

Don't ever pay in cash for a house without some sort of appraisal.

Now, what if somebody told me to pay cash for a house that was never rehabbed? So if you are going strictly for cash flow, you could get screwed sideways through opportunities that turn out to be a hardcore screw coming at you.

First and foremost look at the basics*.* Once you get cash flow on top of that, then greatness! But if you are looking for cash flow as your first requirement, then it will setup you for problems.

The “Normal” Market: A Misconception

Many investors hold the misconception that the current market is not normal and that rates will go back to pandemic levels. Don’t buy this trap. Those rates were artificially low due to the COVID-19 health crisis, quantitative easing, high stock market and crypto growth, and hyper spending.

• Distorted Reality: Quantitative easing created a distorted view of what's “normal” in real estate.
• Long-Term Perspective: Rates could settle in that 8% average, but most people are in the mindset that you should only buy because you got approved.
• Warren Buffet's Wisdom: As said by Warren Buffet, the 30-year fixed-rate mortgage is the “greatest financial instrument in history”.

Adjustable Rate Mortgages: A Ticking Time Bomb

Adjustable rate mortgages (ARMs) may seem tempting with their lower initial rates, but they are a dangerous gamble.

• Unpredictability: ARMs adjust to market fluctuations, potentially leading to dramatically higher payments down the road.
• Foreclosure Risk: ARMs lead to very high foreclosure rates and risk.
• Keep Away: Don't be fooled by loans that offer a zero-down payment. If the person tells you about these types of loans, stay away!

Tips for Securing the Best Deal

For those who still prioritize securing the lowest interest rate, here are a few tips:

1. Find a Trustworthy Lender: Partner with a lender and communicate well.
2. Understand the Market: Track market trends and understand how they impact rates.
3. Be Prepared to Act: Have your application ready and be prepared to lock in a rate when the opportunity arises.

Find somebody you trust and do what you need to do and stay on a course.

Remember, Long-Term Wealth Building is Key

First of all, real estate is a long game

What sets you apart from others who make money in real estate is long term thinking. Long term thinking involves the following important things:

• Diversification: Diversifying your investments across multiple properties spreads your risk and increases your potential for long-term growth.
• Asset Appreciation: Real estate appreciates in value over time, building equity and wealth.
• Compounding: The combination of rental income, property appreciation, and debt devaluation creates compounding returns.

Points: Right Option?

There are instances where some people pay points to get a better interest rate.

They choose to put 25% down because it makes more sense in that scenario. In these cases, it gets very, very close. The analyst will need to go through these things with you and that's why we provide that service.

However, to lock those rates, you need to decide and walk away. In the meantime, keep moving forward, or it doesn't lead to anything good!

Why Real Estate is More Attractive

You are now armed with information that many don't have! Because what that means is that you won't have as much competition to drive prices up, which means

• Less competition drives prices, so you don't have to go over list.
• The investor of today is wired screws up and worried.
• However, just stay informed and be ready to move when those deal hit.

Should Investors Buy?

Now with all that information in mind, what do you think? Should investors buy?

You get your answer from the following:

• Mortage rates really don't matter as long as you are in it and the property carries itself.
• There are very, very strong housing fundamentals in this country right now.
• There is a deficit in the amount of housing that we need.
• Tailwind = Good. Headwind = Not good.
• You want to at least maintain a level of positive cash flow.

Conclusion

So, next time you are investing, don't look at it from the point of view that you only care about whether you are approved or not. Look at a real estate investment over the long term and don’t treat it as a get-rich-quick scheme. This will set you up for the right mindset so that you can reap benefits for the years to come!

So, next time you're tempted to get hung up on mortgage rates, take a step back and consider the big picture. Focus on finding the right property, securing strong rental income, and playing the long game to truly unlock the wealth-building potential of real estate. That's the key to success, and it's far more powerful than chasing marginally lower interest rates.