Interest rates are headed up. How can real estate investors avoid the hit and maximize their investment performance as rates keep on climbing?
Fed Launches New Rate Hike Spree
After hiking interest rates again in December 2016, the Fed says it will need to raise rates several times in 2017. Given that mortgage rates have been hovering around half the historical average — lower than a quarter of their peak according to Fed data — investors, agents, and borrowers could be in for some shocking changes over the next 12 to 18 months.
What can investors do to mitigate the hurt that high rates can bring?
Invest With Cash
The best way to avoid expensive borrowing, which can heighten risk and cramp profit margin potential, is just to avoid it altogether. Just invest with cash instead. This might require finding more affordable markets to invest in, like IN or OH, but there are still many cheap deals out there. Though I am not a fan of investing with cash because of the power of leverage, I see this as a good option for those who want to sleep better at night not having to worry about that mortgage payment every month. It comes down to your comfortability with risk as an investor.
Of course, the problem with limiting yourself to cash investments is that it saps one of the best advantages of investing in real estate — leverage. A great hybrid alternative is to partner up with other investors who have cash. Perhaps 10 of you put in $50,000 or $75,000 dollars and acquire an income producing property to hold together. Even if you have more cash, this enables you to diversify and to empower everyone to enjoy more consistent portfolio performance and lower risk.
If you’re barely cash flow positive now when interests rate are good, then when your term is up and rates are up, you are in trouble. Buying at the right price is crucial. If the deal doesn’t work when you stress test it, then you have to walk away. Stay objective.f
For those with current debt tied to real estate, this is a smart time to refinance and restructure that debt. Refinance ARMs and variable rate lines of credit to longer term fixed rates while you can.
2017 is stacking up to be an exciting and profitable year for U.S. real estate. How much investors really make will depend heavily on their leverage and the rates they are paying. Try the above tips to lower risk, and maximize the upside.
How are you protecting yourself against rising interest rates?
Let me know with a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.