For novice investors, navigating the landscape of the year 2024 may seem like a complex endeavor. You've got the funds, a solid strategy in place, and thorough research under your belt. However, there's a significant hurdle to overcome: the prevailing high interest rates compared to the historically low rates pre-2022.

Delving into the realm of investment financing reveals that investors are burdened with even steeper mortgage interest rates than regular homebuyers (typically ranging between 0.75% and 1.5% higher). The current scenario is indeed intimidating, with usual mortgage rates still teetering slightly below 7%.

While it might appear wise to hold off until the anticipated rate reductions, expected to kick in around mid-2024 according to various real estate pundits, what if we shared that postponing may not be the best decision despite the current interest rates? Furthermore, what if we disclosed that mortgage rates hold less significance when it comes to real estate investments?

Let's explore some reasons behind this rationale.

 

1. Current Mortgage Rates Don’t Reflect the Value of Your Loan Over Time

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.

2. Real Estate Investing Will Pay Off

Investing in real estate offers lucrative rewards in the long term. While some may aim to quickly buy and sell properties for profit, real estate investing is not a get-rich-quick scheme.

The key advantage of real estate as an investment is its tendency to increase in value over time. By having tenants who pay off your mortgage, along with interest, and eventually selling the property at a higher price, the process is straightforward. Despite potential fluctuations in home values, the current high market values indicate that real estate will likely remain a profitable investment in the foreseeable future.

Contrary to paying off a mortgage swiftly, as one would with their own residence, the focus here is on a long-term commitment and maximizing resale value. In the United States, property values consistently appreciate annually, with some regions seeing increases of up to 9%.

Comparatively, even slight variations in mortgage interest rates, such as 0.25% to 1%, may result in negligible differences in monthly payments, usually around $10, depending on the loan terms. These minor fluctuations are insignificant when considering the substantial profits that can be generated through property appreciation. Additionally, as your rental property appreciates in value, so will your rental income.

3. Rates May Not Go Down

Should you anticipate a return to the favorable 4% interest rates from before 2022, prepare for a prolonged wait. Forecasts suggest a potential decrease in rates in 2024, but it may only result in a minor reduction. The likelihood of rates dropping below 6% by year-end remains minimal.

Economists predominantly project that rates will not dip below 6% until 2025. This aligns with the historical trend of rates decreasing more gradually than increasing.

Consider the opportunity cost of delaying your investment and missing out on rental income and equity growth. Acting sooner by purchasing your first investment property could expedite potential profits and allow for diversification of your property portfolio.

4. If the rates do come down prepare for competition

Currently, the level of home sales is the lowest it has been in 28 years. This situation actually presents a positive opportunity for investors. The issue is not the lack of properties available in the market, but rather the decreasing number of buyers.

So, why is this happening? Potential buyers are holding off on making purchases in anticipation of a decline in interest rates. If you have the financial capacity to venture into real estate at this moment, you will encounter significantly less competition for reasonably priced properties compared to what you may face in the future when buyers regain confidence and trigger intense buying activity.