Rising interest rates, falling property values, uncertain rents. Added together, these can make any investor nervous and reluctant to buy more properties. However, all of these factors can also mean it’s the perfect time to continue investing.
I’ve worked with small and large real estate investors, and here are three reasons why I think it’s a good time to be cautious, but not necessarily a time to be scared.
Big Money is made when markets are retreating
Take a look at any book about investing, whether it’s the stock market or the real estate market, and you’ll learn that there is a lot of money to be made when markets are falling. Contrary to conventional wisdom, investors make money when they buy, not when they sell. It makes sense, of course – if you buy low, you’ll make a lot of money when the market goes back up. And history tells us that over time the market always goes back up and real estate always appreciates.
That doesn’t mean that when values are falling, you shouldn’t adjust your strategies. If you like to “flip,” build appropriate cushion into your ARV in case values continue to fall. But if you are a buy and hold investor, short-term values are less important. If the property cash-flows in the short term, you’re only worried about the value when you plan to sell several years down the road.
Don’t get scared off by the sudden increase in rates
It’s undeniable that in the past couple of months, interest rates have increased, and especially for short-term loans (hard money/fix and flip loans). But investors seem to be forgetting that prior to COVID-19, the standard short-term rate was 12%. Yes, rates dropped quickly over the last 2-3 years but those rates were artificially low and have now returned to the historical norm. In most cases the numbers of a deal will tell you that if the deal made sense at 9-10% interest for less than one year, it probably still makes sense at 11%. So as any savvy investor knows, buy based on the numbers, not on emotion.
Long-Term Rates are projected to drop in the next 12-18 months
If you’re a buy and hold investor, there is light at the end of the tunnel. This month inflation slowed, which means the Fed should soon start slowing or ending interest rate increases. The Mortgage Bankers Association, and others, recently predicted standard lending rates in the 5-6% range by the end of next year down from 7-8% we are currently seeing. So, if you’re going to acquire a property, have a strategy for how to make it through until the rates drop. If you are lucky enough to have cash to buy the property, consider doing that and refinance next year. Or, use short-term money and refinance into a long-term loan next year. If your strategy is flipping, you can buy now and anticipate lower mortgage rates for your end buyer by the time your project is complete.
Erick Tjarks is the founder and principal of Arrowbrook Advisors, which provides consulting services to a range of real estate companies. Rock East is a client of Arrowbrook.