Key Takeaways of Interest Rates in Real Estate
- Interest rates determine your cost of borrowing and what your property income should be to make that cost worth it
- Leverage multiplies the return on your equity invested, as long as the rates make sense!
- Certain loan structures can solve for high-cost market conditions, such as opportunities listed on mogul
Interest Rates and Real Estate: What Happens When They Rise?
What are interest rates?
The interest rate is the amount a lender charges a borrower as a percentage of the principal borrowed amount — the amount loaned. The interest rate on a loan is typically expressed on an annual basis and determined as an annual percentage rate (APR). As an example, if your interest rate is 5.0% on a $100 loan, you will be charged $5 per year as a cost of borrowing that $100 loan principal. Loan structures can vary, but this example of simple interest is a great way to understand how we can use loans and interest rates as a tool for success.
Why do interest rates matter?
Firstly, the cost of your loan is what determines the necessary income you need to make that loan worth it. So, if I am paying $5 per year on a $100 loan, I want to make sure that loan is invested in an asset that is generating at least $5 per year in income to cover my loan costs.
Secondly, this cost fluctuates according to benchmarks set typically by a central bank. In the US, interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year to determine the near-term direction of monetary policy and interest rates.
Real Estate Loans
What is a real estate loan?
Loans in the world of real estate come in many shapes and sizes. In the case of single-family rentals, loans typically are structured as a mortgage. A mortgage is a type of loan used to purchase or maintain a home, plot of land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property then serves as collateral to secure the loan.
As we discussed, mortgages have an associated cost of borrowing that is agreed upon between the lender and the borrower at closing. There are usually upfront costs associated with closing the loan that the lender is paid for originating, or creating, the loan.
Why does a real estate loan matter?
Loans are a crucial part of real estate investing. They act as an amplifier of capital so that our purchasing power increases. So, if I have $100, and want to buy a $200 home, I will either need an equity partner to invest with me, or take out a loan for $100 to purchase the $200 home.
Let’s use our $100 loan example with a 5% interest rate. If this is an investment property that will be rented out to generate income, we will want to make sure that the income left after expenses is enough to cover our cost of the loan, and then some (hopefully!). If our $200 home is generating $10 per year after expenses, we will use $5 to pay the annual cost of the loan, and then earn the remaining $5 as a return on our $100 invested. We could even reinvest that $5 to improve our home and increase its income generation potential.
Not only will we receive an income return on our investment, but our investment could also increase in value. So what happens then? The 5% rate that we negotiated with our lender is the final return that they will receive for extending the loan. The income from our investment is covering that cost, and then some additional in our example. If our home increases to $210 from $200, that $10 of gains is 100% ours even though we only provided 50% of the cost of the home (our $100 initial investment). So, we have $5 of income, and $10 of appreciation, our annual return is $15 on our $100 invested. That is 15%. Nice!
If we were to put up all $200 in our example, we would have received the $10 in income after expenses and $10 in appreciation. That is $20, but $20 on our $200 is 10%, which is 5% less than our return on equity with our loan. See? Loans can be powerful tools to amplify our investment return potential.
Real Estate Loans and mogul
How does mogul use real estate loans?
Just like in our mortgage example, mogul uses mortgages as a powerful tool to amplify potential return on equity. mogul has a preferred network of lending partners that are willing to extend mortgages that allow us to amplify our consumer’s purchasing power to acquire lucrative real estate investments. The best part is that mogul handles all of the infrastructure work needed to make that happen. Loan processes can be extremely complicated and are typically riddled with twists and turns that could diminish the return potential of the borrower.
mogul is here to make that process seamless and easy so that you can harness the power of these mortgages with the click of a button. And… you don’t need to personally guarantee the loans! So they won’t show up on your credit report and require documentation and guarantees tied to your social security and identity.
What makes mogul real estate investing different?
mogul has unlocked the ability with specific opportunities to pass along loans from seller to buyer with incredibly beneficial costs of borrowing. So, with the average 30-year fixed mortgage rate around 8% at the time this article was published, mogul was able to pass along a 2.625% interest rate on its first property listed, the Bowser.
In our example with a $100 loan and $10 of post-expense income, we would only receive $2 of income after paying our annual cost of borrowing with an 8% rate. If we kept a 2.625% rate in-place, that income would be over $7 of income after paying our cost of borrowing at a 2.625% rate. That over triples our income after paying our cost of borrowing, significantly amplifying our return on our $100 of equity invested. Not only that, but if we had a target income return in mind when looking for our real estate investment, the lower rates unlock a whole new range of opportunity in assets and markets with nominally lower rental rates, but higher income potential for us as investors after expenses and our potentially lower cost of borrowing. Pretty sweet.
The Bottom Line - Interest Rates in Real Estate
People typically view loans and debt as a negative. In the world of real estate, loans can be used as a powerful tool to increase our earnings potential and amplify your purchasing power. Not all loans are created equal, and when used properly, can allow you to achieve a potentially higher return on your money invested. Interested in learning more? Check out or different properties and blog posts!