Ever noticed an increased level of jitter among your fellow real estate investors on talk of rising interest rates? It's not without reason. The health of the real estate market and the cost of borrowing money are inseparable, and their relationship can make or break a deal. The question for many is, "how will increasing interest rates affect real estate investors?"
Successful real estate investing often involves keeping an eagle eye on the movement of interest rates. For the uninformed, an interest rate is the cost of borrowing money, calculated as a percentage of the loan amount. These figures are not just arbitrary numbers, they are influenced by economic indicators and monetary policy.
The Historical Overview of Interest Rates
To fully grasp the influence of interest rates on real estate investors, one has to understand their historical context. Over the years, fluctuations in interest rates have been a reliable indicator of the general economic climate.
They've scaled dizzying heights during periods of economic trouble, and likewise, sunk to record lows during times of relative prosperity. Historically when they scale to those heights it is only a matter of time before the bubble pops. Let's now delve into the world of interest rates to understand their workings.
Understanding Interest Rates
Interest rates set by the Federal Reserve can impact real estate investors and lenders alike. For instance, when the Federal Reserve increases interest rates, lenders offer higher rates to borrowers, which in turn decreases demand, slowing the pace of purchasing and selling properties.
Lower interest rates usually cause a frenzy of buying and selling of houses. Sometimes it leads to bidding wars and way above asking price offers for those houses that are on the market.
Rising Interest Rates and the Housing Market
Rising interest rates deter individuals from obtaining loans, decreasing demand in the housing market. While it is not intentionally meant to deter people from obtaining loans this is usually just what happens because the higher the interest rate the more you are paying to borrow money.
Thriving rental markets could see an influx of people drawn by competitive rental rates compared to costly mortgage repayments in the face of rising rates. At some points in the market it could be more affordable for individuals to rent rather than buy. So those investors owning rental properties may see an uptick in potential tenants.
The Impact on Real Estate Investors
From the onset, higher costs for borrowed funds could mean less leverage for real estate investors. Investors who rely on borrowed money to purchase properties might find their cash flow constricted by increased mortgage payments. This is particularly tricky when seeking tax advantages through depreciation which can only be achieved if the property shows a taxable income.
Those investors who have been able to find other ways to raise their own capital for investments, like through wholesale real estate, it might have less of an impact on.
Interest Rates and REITs
For investors considering investing in REITs as an alternative to traditional property investment, higher interest rates are generally bad news. When rates climb, REITs have to pay more to borrow money, thereby driving down their distributions. Furthermore, rising rates typically result in share price drops, as investors flee to the perceived safety of bonds.
Rising interest rates can spell turbulent times for real estate investors. But as we have seen, the relationship between interest rates and real estate investment is far from simple. Investors need to factor in not just the cost of borrowing, but also rental market conditions, property values, and broader economic factors in their strategies.
Conclusion
No matter their portfolio's size or investment strategy, all real estate investors need to maintain a firm grasp on prevailing interest rates and the direction in which they seem to be heading. By understanding the impact of interest rate fluctuations, investors can make more informed decisions, leading to more profitable outcomes.
When the next financial bulletin announces a change in interest rates, real estate investors needn't react with panic but can instead view it as another challenge to both mitigate risks and unmask opportunities. After all, it is often in disrupting the calm waters that the shrewdest decisions are made and the most lucrative deals struck.
