Getting into New Investing: Don't focus on the interest rates

[Dominic Pizzi]

Hi all!

I haven't posted on here in a while, but I wanted to take some time to discuss the one thing I have seen being a deterrent to new investors or even investors that want to acquire more real estate: interest rates. 

I am sure that many of us have complained recently about the rise of interest rates, I know we have. A simple google search would show that conventional rates are hovering around 7.5%, at least in NJ, for a 30 year fixed. On the private side for the same area, we're looking at higher than that for a 20% down purchase on a primary or investment property. So why is everyone so scared to enter the game at this moment?

The answer is simple: people set unrealistic expectations on the interest rates at the peak of the pandemic, and rightfully so. Investors and people were jumping into the market with conventional interest rates at 2.5%, and 7.5-8% seems like a crazy jump from that. Market conditions and the FED increasing interest rates to combat inflation has not helped the scenario.  

People are focused too much on the interest rate and not enough on the returns on the property in question. If your property is barely cash flowing at a low interest rate, you are not investing properly. Identifying a property that cash flows very well at the current climate of interest rates would be the best route for any investor. 

If we switch our focus from worrying about the interest rate to worrying about the ROI or cash flows, it will create a lot more wealthy investors through the power of real estate.

Interested to hear everyone's thoughts on this, and I invite differing opinions to have constructive conversations! 

[Mohammed Rahman]

Hey @Dominic Pizzi - I agree overall with the sentiment that the numbers of the deal have to align with your goals, regardless of whatever the rates are at. However, interest rates still matter a lot since they're a big component of the overall cashflow of the deal. 

I don't think people are unrealistic, it's not the best time to be a buyer unless you have a strong motivation to purchase and plan on refinancing when rates cool down. However, it's an excellent time to buy if you can get creative on both sides with a transaction (seller finance, master lease, etc.) and/or you're a cash buyer who can now scoop up properties for a bigger discount than a couple of years ago. 

For commercial buyers, this is even more important due to adjustable rates and shorter term loans.