The economy is picking up and with it, interest rates are slowly rising. Although the historically low rates have been fabulous for real estate investors, we all knew they would go up again. Real estate, like all investments, go in cycles.
What's Coming Down the Line
The Federal Reserve has begun to increase interest rates. This past December, the rate increased by 0.25 percent. The same thing happened again this past March.
What's coming in the future? The Federal Reserve suggests three more increases:
- June 2017
- December 2017
- Sometime in early 2018
These rates will affect all kinds of investments, including real estate. Let's look for a moment at what it might mean.
REITs tend to be invested into different segments of the real estate market. Higher interest rates are good for some of these segments and not quite as good for others. If you are thinking of investing in an REIT, the following have done well with increasing interest rates in the past:
- Short-term industrial properties
Rental Property Investments
Rising rates are often good for those that own rental property. Why? As rates rise, many potential home buyers can no longer qualify for a loan since the rising interest will increase their monthly payments. Such a scenario means that they will turn to renting rather than buying.
In the United States, the supply of homes is low compared to the number of people wanting to rent. As the number of people who need to rent increases, those holding rental properties will be able to increase their rents.
What about those just entering the rental market? The news is good for them, too. Even though the rates are higher, the demand for occupancy means that the higher rents can offset the higher interest your will pay. However, you will want to be sure that your cash flow works in each scenario.
When interest rates rise, properties tend to sit on the market a bit longer. Why? Fewer people can qualify for a loan. Others can qualify, but it takes some wrangling to get the numbers to work out correctly. Since an investor makes more money the faster the home sells, increasing interest rates can be problematic.
However, flipping is not going to go away. You'll just need to calculate longer times between buying an selling. Once again, be sure that your numbers work. If you can make money on a deal with longer sell times, then it won't matter what the interest rate is.
Things to Do
When interest rates begin rising, there are some things a real estate investor should consider. Here are three:
1. Diversify: I feel that diversification is needed all the time because different real estate assets do well in different situations. In this case, consider holding properties longer, and looking to multi-dwelling properties as well as commercial properties.
2. Consider More Than the Interest Rate: Yes, everyone is talking about the interest rate, but that is only a small part of the equation. To still find great deals, look for areas with low taxes. If you are renting, look for higher rental rates and high occupancy rates.
3. Beware of Variable Rates: Unless you are going to hold a property for a short period of time, the variable rate may not be a wise move. If rates rise too fast, you'll end up with a signficantly different cash flow that may not be able to be offset by increased rent rates.
Even with the increases, interest rates are still very low. In general, if you can make the property cash flow, then you have a great deal. Just keep following the best practices for real estate investing, making