Hello my friends. Welcome to another episode of Ask Marco. Well, sort of actually what I did is I took a question that someone submitted just recently and decided to do a full episode on it. It won’t be a long episode, but I thought it was a really good question because it’s probably a question that many people are asking themselves today, and that is, is it a wise idea to buy real estate right now when interest rates are rising? And I thought, Wow, you know what? That’s a good question. So the original question came in from John and he said, Hi, is it wise to buy real estate or property now when interest rates are hiking? In regards, John. Well, let me take that question and expand on it because I think it’s a good question to ponder.
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And I’m sure a lot of people have been pumping the brakes or backing off of investing in real estate because they think it’s getting too expensive to cover the financing. Well, as a side note, just remember that it’s not you that’s paying the mortgage. You’re not the one paying down the debt, it’s your tenant. So as long as the numbers make sense on your investment property, if you’ve done your due diligence and the numbers make sense, they pan out, then by all means make that purchase, make the investment, because over the long term, real estate will pay for itself. Real estate will create wealth. Real estate will generate increasing amounts of cash flow or income for you. It’s just a temporary thing when in the first year or the first few years when you buy rental real estate, that cash flows are lower because the rents aren’t high enough or the mortgage amount is quote-unquote too much or large. Don’t forget, you know, 10, 20, 30 years ago when you or your parents purchased their first property or that property back then and they were wondering if they could afford the mortgage payments.
Well, it might have been a large number back then, but in hindsight, looking back after 10 years, 20 years, even 30 years, you might look at that mortgage payment and laugh at it because it’s so small, relatively speaking in today’s terms. So keep that in mind. You have to have a long-term perspective or long-term horizon when it comes to investment real estate if you’re going to be an investor. So speaking of interest rates or more specifically mortgage rates, let’s look at history. Mortgage rates actually rose pretty sharply this year in 2022. They surpassed 6% on September 15th, and this was the first time this happened since 2008. And even though those increases have been pretty significant, 30-year mortgage rates are still below historical averages, which is nearly about 8%. So keep that in mind, even though we’re at roughly 6% or so today, you have to keep in mind that historical averages are actually higher than what we see today.
Granted, it’s gone up quite a bit over the last six months, seven months. You gotta put everything in perspective and run the numbers. Real estate investing is as much about math as it is about fundamentals. And you also have to keep in mind that mortgage rates are just a benchmark of sorts. If you’re a borrower with strong financials, good credit, a good credit profile, you can get mortgage rates that are competitive and below what we see as industry averages. Plus, you have to remember that with mortgage financing, you can often pay points. In other words, you can pay prepay a certain amount at the close and buy the rate down so you can lower your rate by prepaying a certain percentage of that mortgage loan upfront. So during 2020 and 2021, during the Covid pandemic, the Fed took what some people might call as emergency actions.
In other words, what they did is they pushed interest rates and therefore mortgage rates down below 3% and they kept them there for a very long time. So we saw very, very low mortgage financing and interest rates during those two years of the Covid pandemic. But with inflation surging over the last, let’s call it couple of years, reaching a four decade high, that was actually a 41 year record. Mortgage rates started to rise pretty quickly in 2022. And it’s because of the policy by the Fed of tightening that pushed these rates higher. And so those who were in a position to lock that interest rate early on were in a good position because they were taking advantage of what would be considered low rates at the time compared to where we are today. So if you look at the beginning of the year, rates were just over 3%, maybe around 3.3%, something like that.
And then they slowly and steadily increased where they passed the 2022 average of about 4.95%, let’s call it 5%, that was reached somewhere in mid-April. And then it rates continue to go up. And then they kind of went down and up and down they boughted again early August, and then they continued to go up to where they are today, which is in the 6 to 7% range for the current 30 year mortgage rate. So that’s an incredible increase. That’s more than double from where we were at the very beginning of the year. But once again, I have to say that today’s 30-year mortgage rate still is below the average from a historical perspective. In fact, if you take the average 30-year mortgage rate, and you go back to when Freddie Mac started tracking it in 1971, the average since 1971 was 7.76%. Let’s just call it 7.77. It’s an easy number to remember. Think about it like a slot machine in Las Vegas 77 7, that’s your average rate since 1971.
So Freddie Mac has been basically the main industry source for mortgage rates. They’ve been tracking them since 1971. What’s interesting is between April, 1971 and October, 2022, the 30 year fixed rate mortgage averaged that 7.77%. So when you look at the 30-year fixed rate mortgage today, which is a little over 6%, today’s rates are still relatively speaking affordable compared to those historical mortgage rates. Keep that in mind. Now, I do expect mortgage rates to continue to increase not as quickly as it has since the beginning of the year, but I expect them to continue to increase for at least the next quarter, maybe the next two borders into 2023. But there will come a time, and I believe this will happen next year, and more than likely before the middle of next year, where the Fed will back off and stop tightening, they’ll start to loosen what we essentially call quantitative easing.
And at that point, we’re gonna see confidence being restored in the markets. Interest rates start to come down, mortgage rates will soon follow, and we’ll start to see more competitive rates to help stimulate the housing market, stimulate the economy. Because right now the Fed is just pumping the brakes and they’re trying to dry up or essentially destroy consumer demand, and that will help lower inflation or price inflation because consumers are going to slow down or stop buying goods, therefore, they’re not taking supply off. Supply will increase, demand diminishes, and that provides downward pressure on pricing. So we will see inflation curb. But I digress. So if you look back since let’s say the early 1970s, the highest 30-year mortgage rate was 16.63%. That was in 1981. That’s when we had our highest rates of inflation. Now, that was by all counts, very high inflationary time.
And if you look at that today, the Fed is likely to continue hiking interest rates, and that’s going to lead to further mortgage rate increases. But on the flip side, if the fed’s actions are two aggressive and too excessive, it might lead to a deeper recession. And I say deeper because arguably, we are in a recession right now. So if there’s this tug of war going back with interest rates, it’s going to be almost impossible to predict what will happen to mortgage rates at the end of this year and early next year. My prediction once again is that interest rates and mortgage rates will inch up probably for the next two fed meetings where they’re gonna make decisions about what to do with interest rates. It’s not unlikely for them to pump another three quarter point increase. I don’t see it being less than a half point, but we can all expect interest rates to continue to increase, at least for the foreseeable future.
But as a borrower, especially a mortgage borrower, it doesn’t make a lot of sense to try and time the market. I mean, we have a pretty good idea of what’s gonna happen over the next three to six, maybe nine months. But the best strategy, the best advice you could probably get is to buy real estate when it makes sense to do so. When you’re financially ready, you have the down payment or investment capital for it, and you’re in the right place, the right time, and the right market. And I’ll talk about that here in a few minutes. But regardless of where interest rates are, there’s always a good time and a good place to invest in real estate. I always say that it’s always a good time to invest in real estate because it’s not about when it’s all about where if you are focused on the market and the fundamentals in that market, that will give you what you need to know in terms of timing.
And think about this too, you’re not essentially stuck with a mortgage rate forever, because if rates drop, you could always refinance and get a lower rate as people have done for many years over the last several decades. You know, when rates go up, people lock in as soon as they can. When rates go down, people time, you know those drops every however often, 6, 12, 24 months and refinance into a lower and lower rate. And if you do this right, it’s not an expensive maneuver because if you don’t have a lot of closing costs or refinance costs, then it’s almost free to refinance to a lower rate. So when we look at mortgage rates historically, in other words, important years over time, there’s a few years that stand out. 1981, as I mentioned below, which was a historically a very high inflationary year, 1981 essentially was the worst year for mortgage interest rates on record.
So how bad was it? Well, the average mortgage rate back in 1981 was 16.63% for the year. Now, if you zoom in at a weekly level, the week of October 9th, 1981, mortgage rates actually went up to 18.63. That’s the highest weekly rate on record. But for that year, it’s been very high, 16.63%, and that is almost five times the 2019 annual mortgage rate. So we’ve come a long way since then. And again, it’s all relative, but the objective and rational, run the numbers and take a look at what the numbers are telling you on the properties that you are buying or looking at. By the way, at 16.63%, a hundred thousand dollars mortgage, which is a number I like to use all the time, whether it’s regarding a property to purchase or a mortgage, a hundred thousand dollars mortgage would’ve been an interest payment of $1,400 per month.
Now, compare that to 2008. Essentially the start of the great recession, real estate financing at that time was available for about 6%. According to Freddie Mac, it was about 6%. That was essentially what some people might say was the final gasp of the mortgage meltdown. That’s when things kind of fell apart. And now we were in a slump and we would slowly come out of it as the years went by. But after 2008 rates declined steadily. Now again, that a hundred thousand dollars mortgage at a 6% mortgage rate was about $600 per month, not including taxes, insurance, just principle and interest on a 30 year fixed rate mortgage. So you can see the difference from the $1,400 at 16.6% to about $600 at 6%. In 2016, that’s when we basically had an all time low for mortgage rates. Freddie Mac says that the typical 2016 mortgage was priced just around 3.65%.
So well below 4%, closer to three and a half percent, a hundred thousand dollars mortgage back then at 3.65% would have a monthly principle and interest payment of $915. Again, clearly a much different ballgame back then. Now, just as a point of technicality, there was one week in November of 2012 where mortgage rates actually dropped below that 3.65%. It was actually 3.31%, but that only happened for a week. You know, that doesn’t really count because the year of 2012, the average was higher than that at 3.65% for a 30-year mortgage. In 2019, this is when mortgage rates really started to drop in 2018, funny thing is, as many economists predicted that 2019 mortgage rates would top 5.5%, they were expecting as much as 6%. Well, they turned out to be wrong. It seems to be the case with economists often. So the average mortgage rate in 2018 went from 4.5% to 3.94% in 2019, a considerable drop.
So again, that a hundred thousand dollars mortgage loan at 3.94 was a whopping $948. Then in 2019, when we saw these low mortgage rates, many thought that mortgage rates couldn’t go any lower, but guess what? In 2020, and in 2021, that was proved to be wrong because in 2021, we had the lowest 30-year mortgage rate ever. In July of 2020, the 30 year fixed rate mortgage fell below 3% for the first time, first time in recorded history, and it stayed that low. It was a new record low, and it touched 2.65% in January of 2021. So that a hundred thousand dollars loan at 2.65% was a monthly payment of $806. That was the lowest mortgage rate point in history. So we’re in 2022 and with high or sharp inflation growth, we are seeing higher benchmark rates and a drawback on mortgage stimulus by the Fed mortgage rates are spiking and they are going to continue to go up for the short term or at least the foreseeable future.
But we’ve already seen about a doubling about 3% in a nine month period, going from 3.2% in January to a high of about 6.7% at the end of September. Where do we go from here? Well, nobody knows for sure, but the expectation is that mortgage rates will continue to increase a little bit for the foreseeable future. But the point I’m trying to make there is that that shouldn’t stop you from investing in real estate. If you come across a good deal, sometimes time is what you are working with. So if you want to be, be penny wise and pound foolish, it’s basically saying, I’m gonna wait while property values are appreciating. And granted, not in every market or all the time around the country, every market is independent and unique, and all real estate is local. But if there’s an opportunity with the right property in the right market and things make sense, then move forward with the deal.
Take advantage of it, put it, you know in your portfolio, start taking advantage of that loan amortization and the potential appreciation. It will happen for sure over longer periods of time. But you know, I’m not talking about short term appreciation increases over a three month or six month, or even maybe a one year period. But if you wait it out, you might miss out on opportunity in terms of income and appreciation because you are waiting for 3, 6, 12, 24 months for interest rates to stop in increasing or drop. That’s, in my opinion, often being penny wise and pound foolish. So I have a saying, it’s at the bottom of every single newsletter that we send out every week, and many of you have read it. If you haven’t subscribed to our newsletter, I suggest you do. It’s only one email per week. It’s usually on a Wednesday, sometimes Tuesday, but at the bottom I’ve got this trademark saying that I’ve had for many, many years.
It’s live where you want, invest, where it makes sense. And the whole idea of that saying is to be market agnostic to not be married to any particular market, or especially your backyard if the numbers don’t make sense or if the inventory isn’t there. But investing where it makes sense means that the property you’re looking at or evaluating meets all the criteria. Our criteria for what we call turnkey investment property. So if the investment makes sense, then it makes sense to move forward with it regardless of what mortgage rates or interest rates are at. So what makes a good turnkey property? Well, that criteria comes down to this, the market, the city, the neighborhood, the condition, the financials, and the team. And let me quickly break that down for you because many of you have heard of it, but many of you haven’t. And it’s always a good refresher.
So you always take a top down approach and start with the market, not with the property itself, but the market. Are you in the market of the many markets of the hundreds of markets around the country? That makes sense fundamentally. In other words, it’s a healthy market, it’s growing and has population growth. There’s a healthy job market with diversification. So you have job stability, ideally job growth, and it’s drawing people in because they want to come there for the employment and it’s keeping the people there, there because of that employment and they can afford to live there. In other words, they’re able to keep up with the cost of living and ideally get ahead. So that’s the market, the metro area. That always comes down to the fundamentals, not so much the technicals. Technicals are more about trying to time a market. The fundamentals are about why that market makes sense, why it’s growing or why is it strong.
Then you start to break that down into smaller sections because a market could be made up of dozens, if not even a hundred cities. But you focus in on the cities and the same criteria applies. You know, is it healthy environment, healthy city with growth, population and job growth? Those are the ideals. Then you get a little more granular, you zoom in a little further, and you choose the neighborhoods that make the most sense within that market that are desirable, that have inventory. As far as available properties, there is relatively speaking, low crime, relatively speaking, good schools. Again, this comes down to of price ranges and demographics as well. But you wanna look at those things as well. What fits inside your buy box? What is the criteria of the investment property you’re looking for? Those in many cases apply to the demographics income. It could be things such as socioeconomic status, mobility, age breakdown, a lot of factors.
Then you start to look at specific properties and you do your due diligence, you evaluate the condition. Ideally, you want something that has no repairs, no deferred maintenance. It’s in good condition, and it’s expected to be functional and in good condition with minimal to no repairs for the foreseeable future. I know things will wear down and break down and things happen over time, but you ideally want something that’s not going to be a fixer-upper or something that is going to have deferred maintenance right around the corner, because that’s gonna be costly. You want to have the longest possible life on your mechanicals, the roof and whatever else, everything else. Now, cosmetic things are, you know, something that are quick and easy to fix and often provide a value where you can increase the rent, but the condition is the next thing you look at.
Then you look at the financials. Do the numbers make sense? You could look at the actual numbers if it’s already leased a property that’s performing, or you can look at a performa knowing what the market rent will be, and you run your numbers with the mortgage rates and see if the numbers make sense. Your income minus your expenses, leaves you your net operating income. From that you deduct your mortgage. Your mortgage payment is based on the mortgage rates of the day, and this is where you run your numbers. It’s not hard, doesn’t take long, but it gives you a snapshot of what to expect from that property over the course of a year. Call it the financial performance. And then last but not least, is your team. Your team as far as boots on the ground or concern is your local full service professional property management company or professional property manager. But usually it’s, it’s a small business or maybe a large business, but a management company.
So that is how you break down the turnkey criteria. Market, city, neighborhood, condition, financials and team. Now, in regards to the numbers, I’ll kind of wrap it up with a comparison between interest rates at 4, 5, 6, 7, 8%. Basically what we saw happen, maybe not to 8%, but I just wanted to show you what happens to the mortgage payment when interest rates rise and they’re not at 7 or 8%, but just to show you what happens if mortgage rates went up that high again. So with a hundred thousand dollars mortgage at a 4% interest rate, and again, we’re talking 30 year fixed rate mortgages here throughout my example, your monthly mortgage payment for a hundred thousand dollars mortgage at 4% is $477 per month. These are all per month numbers. Now what happens if mortgage rates go up by 1%?
Now from 4%, we’re looking at a 5% mortgage rate. Your monthly mortgage payment goes up by about $60. It goes up from 4 77 to 530, 7 $60 more per month with a 1% jump in that mortgage rate. And again, this example’s based on a hundred thousand dollars mortgage. So that’s an increase of little over 12%, a 12.6% increase, but your mortgage payment is only $537. If that mortgage rate went up another whole point. So from five to 6%, your monthly mortgage payment is $600 a month. It’s an increase of $63 over the 5% rate as a percentage, that’s an 11.7% increase. So remember, we started at 4%. At 477 at 5% it’s 537, $60 more at 6%, at $600, $63 more. What if we go to 7%? If you have a 7% mortgage, your monthly mortgage payment is now $665, $65 increase. So you see how this works.
You’re looking at increases of about 10 or 11% for every one point in the mortgage rate increase at, so at 7% it’s $665. And lastly, at 8%, your monthly mortgage payment is $734, which is a $69 jump from the 7% mortgage rate. And what’s interesting is when you compare that 4% mortgage to the 8% mortgage, so the mortgage rates have doubled, your monthly payment would have gone up 54%. It didn’t double. Your monthly mortgage payment went up by 54%, but the mortgage interest rate went from 4 to 8%. It doubled. So it’s, it’s interesting to see how that monthly mortgage payment doesn’t double or increased proportionately to what the mortgage rate is doing. And I think that’s important to understand because if mortgage rates rise, sure your, your monthly mortgage payment will rise, but it’s not in lockstep. It’s not a one-for-one increase.
But here’s the bottom line. Run your numbers, do your due diligence, ask questions and have the right team working with you, helping you and surrounding you to ensure that you are successful. You’re asking the right questions, choosing the right markets, the right properties, et cetera, et cetera. So back to the original question, is it wise to buy real estate when interest rates are rising? Well, the short answer would be yes. It just depends. You gotta make sure that you’re looking at the right deal in the right market. So people have done it before, people have been investing in real estate over the last 30, 40, 50 years in inflationary times and in times when interest rates were rising, not dropping, but rising. Because if you look at charts of mortgage rates, you will see that interest rates have gone up many, many times over many years in the past, not just come down.
And investors, smart investors were getting into the market knowing that they were buying in the right areas with the right properties, and they had a long term horizon, a long term perspective. They weren’t flipping the property, they were buying it, making sure that the numbers made sense. So the property paid for itself, it carried itself, and they weathered it out. And often what happens is when interest rates are rising, fewer people can afford to move or buy homes. So they’re forced into the rental pool and there are more renters that are looking for property to rent or lease. And that’s advantageous for you as a real estate investor because now you are going to be purchasing property that becomes part of that stock of housing for the rental market. So there’s always a good side of flip side to every negative thing, and that’s just the way I look at it.
But you know, that’s just the way it is. Interest rates rise, occupancy rates increase, partly because home ownership decreases because fewer people can afford it. And it’s just an advantageous thing for you as a real estate investor if you can get into the market and find the right deals. So I hope you found that helpful. It’s food for thought, something to obviously look at objectively. Just put your thinking head on, run the numbers and, and realize that rising interest rates and rising mortgage rates have its pros and cons. But you look at the advantages of being a real estate investor with rising rates, they won’t rise forever and not when mortgage rates start to come back down. You can refinance lower your rate, increase your cash flow, and take advantage of the opportunities when they come around at the time when it makes sense to do so.
Well, that is it for today. I appreciate you listening. If you have any questions about real estate investing, finance, or even maybe some personal questions, you know, shoot them over to me. Just go to passiverealestateinvesting.com, click on the link or the contact form and just send them over to me. If you haven’t already remembered to subscribe, share the show with your friends and family. We love to grow our listening audience. Visit us on iTunes, leave us a rating and review, and thank you for listening. I will see you all on our next episode.
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