Investing in Real Estate When Mortgage Rates Are High

• Real estate investors aren’t necessarily deterred by rising mortgage rates. 
• Insider spoke to two investors who have $1 million in cash set aside for their next property.
• As long as they can get a great return on capital, they don’t care how much rates have gone up.

Todd Baldwin likes to have cash accessible in case the right property comes along to invest in.

“I keep at least a million dollars in cash ​​— whether that’s going to be for a

down payment

or paying cash for a property — so I’m ready to pull the trigger on something that makes sense,” the 29-year-old Seattle-based investor told Insider. “I know that interest rates are incredibly high right now, but if I find a deal that I want, I’ll take it.”

On the other side of the country, a New Hampshire-based investor is also sitting on seven-figures of cash, patiently waiting for the right deals to come along. He goes by Matt “the Lumberjack Landlord” for privacy reasons, and owns over 100 rental units that gross six figures a month. Insider confirmed these details. 

He’s done two major refinances on his portfolio in the last 12 months to free up cash. The first was in July 2021. He pulled out seven-figures, reinvested it before January of 2022, and “churned it into another 4 to 5 million dollars worth of assets,” he said. 

His second refinance was in March 2022. While refinancing twice in a year works out in Matt’s case, it doesn’t necessarily make sense for the regular, individual homeowner because of the

closing costs

that come with the process.

“Now is the time to grab as much money as I can out of these assets, and then have the cash available if the market corrects aggressively,” he said of his second refinance. “I don’t think it’ll be a 50% correction because we just don’t have the bad loan structures that we had in the Great

Recession

, but it could be a 10% to 20% drop in prices.” 

Since that second major refinance, Matt has used his cash stockpile to purchase two more homes — a triplex and a fourplex — and a piece of land. Even after making those purchases, “I have more cash than I did in February,” he said. “That’s the beauty of cash-flowing assets.” 

The rising interest rates don’t intimidate him. 

“Right now lending is between 5.75% and 6%,” said Matt, referring to today’s mortgage rates. “If I look back even to February or March, it was 4%, so, effectively, rates for me have gone up 50%,” he said. “But, for any sound investor, it’s not what something costs — it’s what value is there.”

Matt, who prefers to make a 20-25% down payment every time he buys a property, doesn’t mind high rates as long as his return on capital — the profit he could potentially earn from his real-estate holdings after factoring in expenses — is “great,” he said.

“To understand what a great deal is, you have to understand what every other deal is,” he added. If duplexes in his market are returning an average of 7% annually, he’s looking for deals that will earn him at least 10%, he explained. “It doesn’t matter if the mortgage rate is 6% or 16%. All that matters is my return on that cash.”

The most recent property he bought, the fourplex, is already returning over 30% in rents, he said. To get a great return on capital, he does a couple of things: One, he self-manages all of his properties, which helps keep his costs low. Two, he has a complete understanding of rent prices in his area.

“​​I’m very current on what the rent is,” said Matt. “There are products out there like Rentometer, but they’re usually as much as three to six months behind, and that’s a problem when rents are moving up as quickly as they are.”

Knowing what he can rent a unit out for is critical to his success, he added: “Some deals look like they have a marginal return based on what you think, but maybe you’re under market.” It helps that he has his own portfolio of more than 100 units to understand rental rates, but he also reaches out to other landlords in the area to understand what they’re renting their properties for. 

Purchasing land was a new investment for Matt. He’s anticipating a recession in the first quarter of 2023, and figures the cost to build property will eventually go down. Plus, it would allow him to create jobs for construction companies during what could be a challenging economic time.  

“The way that I looked at it was: I can have my money sit in the bank and basically not grow at all. Or, if I really believe there’s going to be a market correction, and that commodities prices are going to come down, the cost of building will come down and there will be more people available to do building,” said Matt, who hasn’t started construction yet because of rising prices due to inflation. “So, the land, if I can get a decent price on it, is worth buying.”

Baldwin, who buys real estate in Seattle and netted more than $1.5 million from real estate sales and rental income in 2021, hasn’t been deterred by rising rates, either. 

He hasn’t bought a property in over two years, but that’s because he’s picky, he said: “It’s not because I’m afraid of the market or because I’m bearish on real estate; it’s just because I’m very, very specific with my criteria. But that’s part of the reason I’ve done so well — I only buy specific properties.”

Baldwin is looking for multi-family homes, new or relatively new builds, and no HOA fees. He’s also looking to buy in up-and-coming areas — places that have been traditionally overlooked that show signs of development, he added. 

“There is never the perfect time to buy real estate,” he said. “People can rush into things, which is not good, but they can also wait around and miss opportunities. I’m in favor of, don’t wait to buy real estate; buy real estate and wait. If you do that, you can take advantage of long-term growth.”

If you’re ready to get involved in real estate, or expand your portfolio, there are a couple of things you can do today, advised Matt: “Start having conversations with your bank right now. Ask them how they do business in a recession. Ask them what they’d like to see from you in order for them to get comfortable to consider having you as a borrower.”

Next, “double your efforts in networking,” he said. “You have no idea where that next deal is coming from.” Connect with local real estate agents, other investors in your area, and wholesalers. “Get in front of as many people as possible.”

Finally, “create cash,” he said. “Any spending that you’re doing that you don’t have to be doing, stop.” After all, investing real estate requires up front cash — for a down payment and closing costs — and there’s no way around it.