Buying in a Higher Interest Rate Environment

[Josh Green]

TLDR; I prefer buying in a high interest rate environment and then refinancing in a handful of years, rather than buying in a low interest rate environment and refinancing in a handful of years.

Wanted to share my thoughts and see what others (new and seasoned investors) think! Not long ago I started my REI journey in a low interest rate market (historically). First couple of acquisitions I was able to get some awesome interest rates - 3.5% and 2.625%, respectively. More recently in the increasing interest rate market coupled with going with a commercial investor loan my latest rate is 7+%.

At first, I felt I was so lucky to be buying with low interest rates and was discouraged at the elevated rates currently like many others.  I thought about it with a long-term mindset and realized something: 

I would rather buy in a higher interest rate environment!  Here's why (hear me out):

"marry the property, but date the rate"

Rates, even 30yr fixed, should be viewed as temporary. For an investor, long-term hold and growth is what makes REI so powerful and one of the primary tools within REI is leverage (specifically here, a refinance). If you buy property A at a higher interest rate on day 1 you will see outsized returns in the next cycle when interest rates drop below that mark.  The first few years you cash flow, pay down the loan a little, etc until the rates drop to your liking.  You go to refinance and find the value of the home to be much higher during times of lower interest rate (supply/demand principal).  So, you capitalize both in appreciation/LTV cash out AND the lowering of your initial interest payment in this scenario.  Likely, your PITI will drop, your rents are higher than when you started day 1, AND your property value will inversely increase with interest rate decreases.

In scenario 2, you buy with a low interest rate but with a higher purchase price (accordingly).  That purchase price is locked in and later, when you go to refinance, you will be stuck with a higher interest rate than where you started.  Your PITI will likely increase and now your amortized mortgage has a higher interest rate slowing down your initial principal pay down.

Of course, as you hold 10+ years you may consider yet ANOTHER cycle of refinancing so this really flips back to favoring scenario 2.  However, assuming interest rate cycles are 3-10 years I would prefer to take scenario 1 (buying in a high interest rate environment) where I plan to refinance within 4-7 years of initial purchase.

Hope that was easy to follow/understand!  Just some thoughts on my mind :)