“Mortgage Interest Rates Crack 4% Barrier” blared the above-the-fold headline in USA Today in a recent article by Julie Schmit. 

In her USA Today piece, Schmit, in a very helpful article for all real estate investors, detailed the impact that higher mortgage rates will have on the housing market.  Some see the higher costs of borrowing as dragging down the prices of real estate.  Michelle Meyer, a housing economist with the Bank of America, cautioned in the article that this could, “weigh on home price appreciation.”

 For the serious real estate investor, and that is the only way one should be with any investing, higher mortgage should rates should not be a cause for concern or hesitation.

That is due to passive investing for the long term being the best way to profit from buying real estate, or any asset for that matter.  The constant buying and selling of any asset is doomed for a variety of factors.  A major one is that it is impossible to time the market.  No one knows when will be the peak or the valley for an asset class.  As just one example, it was reported in a recent article in The Wall Street Journal that not a single analyst who followed the Japanese Yen expected it to reach 100 to the US Dollar.  All very well educated, experienced, highly compensated, and experts in the field; and all 15 were wrong!

Another significant factor is that transactional costs can turn selling an asset at a price than was paid for it into a loss.  That is particularly true for real estate sales.  The transfer taxes, real estate commissions, and capital gains taxes can be well over 30%, if not higher for a transaction.  Losing money after selling for more than a 25% gain should convince all that passive investing for the long term is the most desireable strategy in real estate. 

This was perhaps summed up best by Warren Buffett, considered by many to be the greatest investor of all time, when he stated that in not being a passive owner with a long term horizon for holding the asset, money will be lost from excessive transactions as, "For investors as a whole, returns decrease as motions increase."

Therefore, a rise in interest rates should not deter anyone from real estate investing.

There should always a margin of safety for any transaction.  That is particularly true for investing in real estate when a mortgage can be 30 years long.  That time period obviously allows an investor plenty of opportunities to raise the rent.  As rent historically increases about 5% a year, that means over the length of a 30-year mortgage the rent will double twice.  

So a housing renting for $1000 a month for year 1, will be renting for more than $2000 a month at year 15, with the 5% annual increase.  At year 30, the monthly rent will be over $4000.  But if the 30-year mortgage is at a fixed rate, which is always prudent, it will still be the same as it was for the first month.  At the end of the thirty-year mortgage, the house will be owned free and clear with rental income coming in at $4000 a month clip and increasing 5% yearly (the yearly increase at this stage will be almost equal to the $1000 beginning rent).

That basic scenario demonstrates clearly why passive investing with a long approach should not be bothered by mortgage interest rates rising and is obviously the best way to go in real estate.