How Do Interest Rates Impact Real Estate Investing? 

Your investment strategy in the midst of rising interest rates and inflationary pressure will depend on your portfolio and goals. 
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Inflation is rising at a historic pace, putting pressure on budget-conscious consumers that hasn’t been felt in decades. Prices for goods and services have reached a year-over-year rate of 9.1%, the highest the U.S. has experienced since 1981, according to data from the Bureau of Labor Statistics 

In addition to rising prices for everyday goods and services, home prices have leaped even higher than the inflation rate in the past two years. 

In the face of this inflationary climate, the Federal Reserve continues to raise interest rates in an effort to slow spending and tackle the economic problems Americans are experiencing. As a result, the housing market may experience challenges in the months to come. 

How will this affect real estate investors? Each portfolio is different, which means situations will vary. Here are a few things to consider. 

The Economic Impact 

The higher cost of borrowing results in more expensive credit card and loan payments, which usually encourage people to reduce spending.  

For most families, saving will become a top priority. Americans may be less inclined to go on vacation, visit restaurants, and spend unnecessary money. 

This conservative spending also translates to businesses, which may be more likely to reduce investments if the economy feels rocky. This can even have an effect on hiring. 

The Real Estate Market Impact 

When interest rates rise, buyers become more hesitant. They often analyze their pocketbooks, reevaluating whether it’s a good time to take out a mortgage — especially when high interest rates make borrowing more expensive.  

A downturn in prospective buyers could lead to more supply, prompting a drop in home prices.  

Your Existing Portfolio May Be More Profitable 

Rising interest rates can actually be good news when it comes to your existing properties because as interest rates rise, so does rent.  

Assuming you have a fixed-rate mortgage and your monthly payment won’t change, raising your rental prices to reflect the current market will increase your monthly income.  

Selling May Yield Strong Returns 

Investors who are planning to sell their properties may expect strong returns, but it depends on their situation. 

As interest rates rise, there may be less demand for housing because borrowing is so expensive. When demand is down, it can result in two different scenarios.  

If the property is highly desirable, buyers may be willing to make a competitive offer on the home, especially if they’re moving to escape high prices in other cities or states. However, some sellers will find that they must reduce their price to attract buyers. 

For investors who want to sell their investment properties, there are many options to consider when determining where to invest those proceeds. 

READ — Pros and Cons of Investing in Student Housing

New Investments Will Likely Cost More 

Unfortunately, real estate investors will likely face higher home prices, just like the average home buyer. 

Even if you find a property that would normally fall within your budget comfortably, rising interest rates can make your monthly payment more expensive.   

Even a 1% difference in interest rates can result in a difference of more than $100 on a home that’s priced at $200,000. Although that may not sound like much, over the course of a year, this small difference will add up.   

For investors who need to borrow much more than $200,000, the difference will be felt on an even more significant level. You may be able to shop around and find more appealing loans for your investment properties, but it won’t be easy in this economy. 

READ — How to Invest in a Rental Property with No Money Down 

How To Move Forward 

First, remember that real estate is a worthy investment strategy that can usually weather economic storms.  

Financial advisors recommend real estate investing because it can help Americans preserve and build wealth, and the value you’ll reap is much more predictable than other methods of investing, such as the stock market. 

As you evaluate your portfolio, think about your long-term goals and when you’d like to reach those goals. For some investors, it may be best to look for a real estate agent who can help you advance your purchasing goals, especially if you’re already in the business of flipping homes or have capital readily available.  

On the other hand, many investors may want to hold off on acquiring new property. There’s nothing wrong with patiently paying down your mortgages as you wait for the market to turn around.

Your investment strategy in the midst of rising interest rates and inflationary pressure will depend on your portfolio and goals. 

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is also a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.

Categories: Industry Trends, Real Estate