The real estate industry has taken its fair share of lumps this year. We’re no strangers to the challenges brought by rising interest rates, inflation, recession, and big price tags.
Despite all these obstacles, it’s still a good time to invest in real estate.
No matter what the market does, real estate is the asset to own. As buy-and-hold investors, you want to maximize your “hold” time. While it’s tempting to sit out this stage of the market, there are ways to mitigate the challenges we’re all facing and still come out on top. Rental rates are growing fast, and demand is at an all-time high. You can’t afford to sit this one out.
5 Ways Investors Can Combat High Interest Rates
#1. Increase your down payment
One of the simplest ways to deal with the impact of a higher interest rate is simply to leverage less debt. Interest rates are higher than they’ve been in multiple decades, but you’ll still find folks who remember locking in rates at 18%. It wasn’t as burdensome then as it is now because real estate was more affordable.
It’s just math! Even just putting down 30% rather than 20% on a property – or perhaps more – can significantly lower your monthly mortgage payment regardless of the interest rate. Banks will be more willing to offer you a lower rate with a larger down payment, as they’re taking on less risk. You’ll start with more equity in the property, too.
#2. Plan for future refinancing
Of course, higher interest rates, regardless of how much you borrow, equate to higher costs over the lifetime of your mortgage. Thankfully, we’re not expecting high interest rates to last. We’re expecting interest rates to come back down between the next 36 and 48 months, perhaps even as soon as next year. It depends on how well the market handles inflation in the coming months. If inflation eases, then we’ll likely see a return to lower rates sooner rather than later.
#3. Protect your credit score
In 2021, the average U.S. credit score rose to almost 700 – generally considered the low side of “good.” But investors want to breach at least 720 and ideally sit near or above 800. An excellent credit rating not only makes it easier to obtain lender financing, but it can help you negotiate a more favorable interest rate. Remember, when we see interest rates, the real rate we’ll get based on a detailed mortgage application can differ significantly.
The rate you can obtain depends on a variety of factors: down payment, property location, credit score, loan term, loan type, and interest rate type. While there are factors that investors can’t control, there are elements you can influence. Take full advantage of them.
#4. Optimize cash flow
Sometimes easing the sting of high interest rates doesn’t have anything to do with acquisition strategies. Part of handling fluctuating economic conditions involves creating a cushion of cash flow and equity to handle more trying times. Effective investing isn’t just about the sheer number of assets you hold, but rather the quality of those assets.
While real estate investors should scale their portfolios, take time to make the most of what you already have, too. The more stable and established your current investments are, the more those profits can offset rising costs in other areas.
That’s not to mention that adding value to your property both through strategic renovations and excellent property management allows you to justifiably raise rental rates. Not only that, but you force appreciation in the property, too, and help it grow and maintain value over time.
#5. Stress test potential investments
Running the numbers is a key part of due diligence in real estate investment. We don’t rely on emotions or feelings here. So run some hypothetical numbers through your current deals as a stress test. At what point do interest rates cause you to lose money? Where do margins shrink beyond acceptable levels? Then, can you adjust the deal to regain lost ground?
As real estate investors, we’ve got to make sure that the assets we acquire fit in with our portfolio, standards of success, risk tolerance, and overall short- and long-term goals.
Join forces with the turnkey provider doing everything for your success. Talk to your advisor today.
