In real estate investing circles, it’s the most asked question these days: “In a rising interest rate environment, do I buy a rental property?” As a lender, who clients often turn to for advice, I’ve been attending conferences, webinars and reading a lot of articles to “get smarter” on the topic. Unfortunately, I can’t give you a definitive answer, but I can give you a few things to consider that really resonate with me:
- Realistic CAP Rate Expectations: Those who started investing in recent years, when interest rates were at historic lows, were looking for historically unrealistic CAP rates. Expecting 10-12% CAPs over the long-term would simply defy history. Now that interest rates have gone up, those 10-12% CAP rates might be 6-8%. The seasoned real estate investors who I have talked to all agree that those are more in line with historical trends – and still make real estate a strong investment over time.
- There is Not Only One Real Estate Market: There is a lot going on in our communities beyond interest rates, so it’s crucial to understand what is happening in your market. I’ve been interested to hear some very experienced real estate professionals predicting tough times for some markets that have been very hot the past few years. For example, some areas have been attractive because of lower taxes. But as more people move to a community, it requires more infrastructure. Building and maintaining more infrastructure often results in higher taxes. Another thing to consider: many people are going back to the office – at least part time. Remote communities have been thriving the past couple of years, but is living 200 miles from your office still practical? It is imperative to understand your market and follow the trends.
- There is a Massive Housing Shortage in the United States: By some estimates, the country needs an additional 3 million homes to meet the current demand. So if fundamental economics hold, low supply and high demand equals higher values and higher rents. As community members, this might be bad news. But for real estate investors, this is a good problem to have.
I wish I had a crystal ball – I don’t. But the next best thing is talking with and listening to those who have experienced tumultuous times before. And their bottom line – the fundamentals of how to evaluate a real estate investment haven’t changed.