An underestimated, but extremely important, source of real estate profits, financing can drastically changes the success of an investment. While an investment should not be made solely on the fact that a borrower can obtain favorable financing, financing options should play a very important role in analyzing an investment opportunity.

Consider the interest rate an investor will pay on a mortgage. Lets take a $125,000 investment property as an example. An investor puts 20% down and obtains a standard 30-year amortizing mortgage for $100,000. At an interest rate of 5% the investor pays approximately $535/month, at 6% its $600 and at 7% its $665. At 5%, the investor pays $130/month or $1,560/year less than he/she would have paid at 7%.

Taking this a step further, lets say an investor has to choose between buying today or waiting six months in hopes that the home will sell for less. If the home decreases in value by 5% after six months, but the interest rate increases by 1%, was it worth the wait for the investor? Lets take a look. Now the investor pays $118,750 for the house or 5% less than $125,000, but has to pay an interest rate of 6% instead of 5%.

Interestingly, the investor saves $1,250 on the initial down payment. Now, instead of putting $25,000 down or 20% of $125,000, the investor only puts down $23,750 or 20% of $118,750. The monthly payments show a different story. The $125,000 pays $535/month, while the $118,750 investor pays $570/month or a difference of $420/year. In less than three years, the $125,000 investor will be better off. Again, we assume that this is the same property, so there will be no difference in future appreciation. In this example, the owner of the $125,000 house would see their value depreciate 5% in the first six months and would then experience the exact same upside or downside as the owner in the second scenario who buys in at $118,750.

This analysis shows the importance of locking in low, fixed-rate financing for long term investments. Periods of historically low mortgage rates represent excellent buying opportunities in down markets. Low fixed rate financing allows long term investors to weather moderate deprecation, while locking in a low interest expense when the market turns around.

Novice investors often worry too much about buying before the bottom. When considering investing, it is better to consider the entire investment landscape. Historically low interest rates and deep discounts in real estate values provide excellent investment opportunities.