How Should Real Estate Investors Handle Increasing Interest Rates?
As interest rates creep higher, real estate investors feel a pinch squeezing their profit margins.
While it’s still possible to make a healthy return on your investment in this market, those who react quickly and intelligently to changing conditions will stay ahead of the curve. Moguls are forging ahead regardless, while newbies should learn flexibility and understand how rising interest rates impact their goals.
Here are a few tips for increasing interest rates as a real estate investor.
1. Know What the Fed is Up to
The Federal Reserve controls the overnight lending rate, which indirectly affects the 10-year Treasury yield, which is a leading indicator for 30-year mortgage rates. They usually raise rates in response to a strengthening economy—more people are buying homes, and businesses are expanding, so inflationary pressures start to build.
Currently, the Fed is cleaning up the mess caused by supply chain disruptions, government stimulus, and the Russian invasion of Ukraine. But, unfortunately, the solution they’re implementing impacts mortgage rates, corresponding to housing affordability.
For example, when the Fed announced a steep rate hike in June 2022, mortgage rates skyrocketed 55 basis points—the most significant one-week change in decades. They didn’t stop there either, as they increased rates by 75 basis points again in the following month.
Part of their solution is also “quantitative tightening” or selling mortgage-backed securities they purchased to increase the money supply during COVID-19. They bought $1.3 trillion of these securities, raising their stash to $2.7 trillion. As they sell these assets, it’ll force our economy to slow down and affect mortgage rates.
Plus, mortgage supply is dropping due to tightening lending criteria, notably with refinance loans.
The changing lending landscape makes things difficult for real estate investors like you. But those willing to adjust rather than give up will find that the situation also provides opportunities.
2. Understand the Impact of Lending Power
The Fed impacts mortgage rates like any other interest rate fluctuations, so consumer rates were already baked into the market before the Fed took action. In fact, lending experts say that the pool of buyers has already changed in response.
“We saw many customers [drag] their feet on buying, pull the trigger, or get serious about it. It’s almost pushed them further into the market because they just see the upward momentum of interest rates,” said Chelsea Wagner, the Senior Vice President of Partnerships in Lower.
In other words, buyers want to get into the market before it’s too late.
Now, while interest rates and home values are on an upward trajectory, the competition in the industry has dampened slightly. We see a modest increase in inventory along with a decrease in affordability, dropping the number of offers submitted for each property. Still, the average loan amount is steady.
Buyers are approaching deals with more assets to cover an appraisal gap. Higher interest rates don’t leave much space for buyers who come to the table with less, especially with the tightening underwriting criteria. Anxious investors walk away from the challenge, but the pros simply shrug it off.
“More sophisticated investors were not surprised,” said Alex Bekeza of Investor Property Loan on the June rate hike. Instead of recoiling or giving up on real estate investing entirely, real estate moguls changed their strategy and went after deals that’ll still be profitable under the new conditions.
One helpful rule of thumb is that for every 1% increase in interest rates, there is an approximately 10% decline in your buying power. So, if you’re looking at a $200,000 property, a 1% interest rate increase would mean you’d need approximately $20,000 more for the down payment.
3. Find Creative Ways to Get Favorable Outcomes
Continue to invest! There are ways to still achieve your investment goals. Here are four ways to push through like a seasoned investor:
- Use Adjustable Rate Mortgages: These mortgages have lower interest rates during the initial fixed period, allow smaller monthly payments, and give you the option to refinance as rates shift.
- Refinance your Short-Term Loans into Longer-Term Loans Faster: If you’re a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investor, refinancing faster as rates increase will net you a lower rate. Moving quickly in the shifting environment will ensure that you continue to profit from your investments.
- Aggressively Price Your Offers: Investors can offset higher rates and monthly loan payments with lower purchase prices. Many sellers may be in denial about higher rates affecting sales prices, but just say, “next” and move on.
- Use Seller Financing: Many sellers have low loan rates that you can leverage by making Subject-To and Land Contract offers. Brush up on these, so you can expertly explain them to sellers.
Be nimble and adapt to change while continuing to invest in real estate.
Real Estate Market Tricks for Handling Inflation Rate
Mortgage interest rates are on the rise, so you may find fewer deals that make financial sense. But with extra patience, you don’t have to walk away from real estate entirely and miss excellent opportunities.
Check with your board of advisors and prepare for discussing your budget and investment strategy. The more you understand the gravity and requirement of the situation, the better you’ll structure deals that get the most profit regardless of the interest rate dynamics.
Don’t have interest rates catch you off guard and you’ll take advantage of any market conditions.
Do you need more help? Get in touch with our team of property management experts. We’ve been in the industry for over two decades and know all there is to weather rising interest rate storms.