A Top Real Estate Investor Explains Why High Rates Don’t Bother Him

Jeremy Barker wants investors to stop obsessing over things they can’t control, including mortgage rates.

“Quit worrying about interest rates,” the financially independent real estate investor and entrepreneur told Business Insider.

Instead, home in on your market — commit to knowing the ins and outs better than anyone else — and then find deals that will work in any sort of interest-rate environment.

“Spend the time to educate yourself and understand all about what the occupancy rates are, what the lease rates are, what the building purchase price is, what the current cap rates could be, what your cash out opportunity looks like,” said Barker, who leaned on research early in his real estate career before he had any of his own capital to work with.

There are a few particularly important numbers to understand: The average rent rate — what you could bring in each month in rental income — and your monthly expenses, beyond your mortgage payment.

“People are all tied up about these interest rates being 6.5%, 7%,” Barker said. “Who cares what the interest rate is? If your rent roll is greater than your debt service, and you can still keep the margins and growth you’re looking for, do we really, truly want to get tied up in the minutia of percentage of interest?”

Rather than focus on rates, “I think we have to just do the homework and spend a little time to reverse engineer stuff, think about pricing, and think about ‘what is the opportunity?'” he added. “When other people see a lack of opportunity, a different lens could probably see some opportunity there.”

Barker, who’s scaled to more than 30 commercial and residential properties, sees opportunity in a high-interest rate environment. There tends to be less competition. Plus, “when the interest rates are high, values are down, especially in commercial real estate,” he said.

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Think about the bigger picture

There are multiple ways to build wealth via real estate, beyond rental income.

One of the top advantages real estate investing has over stock market investing, for example, is that you can borrow a lot of money from a mortgage lender to buy the asset, but you don’t have to share any of the appreciation with your lender.

For example, say you put 10% down on a $1 million home, meaning you’re paying $100,000 upfront and borrowing $900,000 from your lender. If the house goes up 10% in value, it’s now worth $1.1 million, meaning you’ve made $100,000. It’s all yours. You don’t have to share it with your lender, even though they fronted you $900,000.

That’s what real estate investors like to call levered appreciation.

“The money the bank puts in is irrelevant. What matters is how much you personally have to put in,” said Barker, providing another example: “You buy a house for $200,000, and you sell it for $300,000. What do your friends tell you? ‘I made $100,000.’ Fair enough.”

But let’s say you only put 10% down on the property, so you’re out of pocket $20,000, he added. That means, “you took $20,000 and turned it into $100,000. You 5 times-ed your money.”

The lower you can keep the amount of money you’re personally putting in, “the higher the multiple goes,” he said. The puzzle to solve then becomes: “How much do you personally have to come to the table with to get the asset that gives you the return you’re looking for?”