Average interest rates on a 30-year fixed mortgage have been at historic lows from 2013 to 2021. This created the conditions for a wild housing market, especially in the last few years as we’ve seen record low inventory and bidding wars galore. However, as we enter the Spring of 2022, we are seeing that interest rates and inflation are on the rise, suggesting a change in our economic environment. But what does this mean for real estate investors and how do assets in real estate respond differently from other investments in such a period of economic expansion?
In this article, we’ve broken down the top 3 things Investors need to know about rising interest rates, so you don’t have to!
Investments in Real Estate can Weather the Economic Storm..
While rising interest rates might negatively impact the value of stocks, bonds, and other financial assets; real estate tends to produce more consistent performance in rising rate environments. Additionally, with inflation rates rising to a 40-year record high of 7.9% in February 2022, historical data suggest that average dividend income from REITs trading on the stock exchange can outperform inflation in most cases. Similarly, according to a 43-year review of the NCREIF Property Index, private real estate returns also stay consistent even during times of inflation (Forbes, 2022).
All this to say, that historical data suggests that investments in real estate can maintain their purchasing power even during such turbulent economic environments. Which is great news for us real estate investors!
Property Values and Rents Are on the Rise…
Even better than knowing your investment will withstand rising rates and inflation, is the knowledge that these conditions could have significant benefits for owners of real estate. Overall, during periods of high inflation, property values will appreciate keeping pace with inflation.
Additionally, with rising prices comes less development as the price of materials and labor will increase leaving a supply shortage and new demand for existing housing. Interest rates increasing will also mean fewer people can afford to buy a house and would instead turn to the option of renting. This increases the demand for rentals and allows landlords to raise their rents to keep up with the demand. Higher cash flow from investment properties is a natural outcome of occupancy rates rising. CoreLogic data demonstrates this by documenting the rise in rents this last year, with a 10.2% year-over-year nationwide increase in rent in September 2021.
For all our BRRRR friends out there, if you have already refinanced your property and are comfortably renting it out (or even increasing rent), you can rest assured that your fixed-rate mortgage payments will stay the same, while your equity growth increases.
The One Downside to all of This…
Now for the average investor, this seems like a pretty good scenario. Interest rates and inflation will continue to ebb and flow, but real estate value will stay relatively consistent and even outperform other investments. However, one key thing to keep in mind is that with mortgage rates rising, demand for real estate (as mentioned above) will decline due to more expensive financing. If you are only sticking to the fix n’ flips, you might see a negative impact when you go to sell your property. But there are ways to work around this and make the market work for you. For example, working with brokers who know the areas in town that have stayed consistently in demand is a great way to navigate this landscape and continue to see solid ROIs.
Overall, while interest rates and inflation rise to historic levels, it seems like investing in real estate can provide relatively high yields and low volatility. And next year’s projections for the real estate market are strong! According to Forbes, “U.S. multifamily investments volume is expected to exceed $234 billion in 2022, or a 10% increase over 2021, continuing its strong recovery.”
Are you interested in making smart investments even in economically uncertain times? Then real estate investing might be the best option for you! Reach out to CPL today to see how we can support you in turning your investment goals into a reality.