Mortgages & Creative Financing

How to Avoid the Impact of Higher Interest Rates on Your Portfolio

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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Interest rates are headed up. How can real estate investors avoid the hit and maximize their investment performance as rates keep on climbing?

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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?

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Related: Mortgage Interest Rates Are Rising. Will They Crush Your Rental Portfolio?

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.

Partner Up

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.

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Buy Right

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

Related: The Home Equity Line of Credit (HELOC) Interest Deduction: What You Should Know Before Filing Taxes

Refinance

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.

Summary

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!

With just under a decade of experience in the real estate industry, Sterling currently manages over $10MM in capital, which is deployed across a $26MM real estate portfolio made up of multifamily apartments and single-family homes. Through the company he co-founded, Holdfolio, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single-family investing and apartment investing to wholesaling and scaling a business.

    Brent M. Investor from Hayward, California
    Replied over 2 years ago
    All good suggestions, but the threat of Fed hikes is an empty one. In October 2008, when the world was ending, the Fed was so frightened they lowered the funds rate all the way to 1%. Now, we’ve had 8 years of “great” recovery, unemployment is low, asset prices are high and the funds rate stands,,, 25 basis points lower. Investors should start playing defense, but not against interest rate hikes… in my opinion of course.