{"id":144046,"date":"2022-08-01T10:31:44","date_gmt":"2022-08-01T16:31:44","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=144046"},"modified":"2023-08-08T14:23:29","modified_gmt":"2023-08-08T20:23:29","slug":"rising-interest-rates-challenge-investors","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/rising-interest-rates-challenge-investors","title":{"rendered":"Rising Interest Rates Challenge Investors \u2014 Here&#8217;s What Expert Lenders Suggest You Do"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC4446920741&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Rising interest rates may be squeezing profit margins, but there are still deals that offer competitive returns, so the most experienced investors are forging ahead regardless. Rookies can learn from their flexibility but must understand how the changing lending landscape will impact their goals. We asked lending experts how the Fed\u2019s reaction to inflation affects lending so that investors can be prepared to adapt accordingly.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Here\u2019s what you need to know about the Fed\u2019s current and future plans and what they mean for your real estate business.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What The Fed Has Been Doing<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The Fed is currently charged with cleaning up the inflationary mess caused by government stimulus, supply chain disruptions, and the Russian invasion of Ukraine. The tools they\u2019re using are impacting mortgage rates and the corresponding affordability of housing.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">After the Fed announced the steepest rate hike in decades, the mortgage rate increased 55 basis points the week of June 16, 2022, the largest one-week change we\u2019ve seen since 1987, according to&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.freddiemac.com\/pmms\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Freddie Mac<\/span><\/a><span data-preserver-spaces=\"true\">. The Fed didn\u2019t stop there. They increased rates by 75 basis points again in late July.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And that\u2019s not the only action from the Fed that is causing concern for investors. Part of the cleanup will require quantitative tightening\u2014or the selling of mortgage-backed securities that the Fed purchased to increase the monetary supply during the pandemic.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to an&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.axios.com\/2022\/05\/18\/fed-mortgage-portfolio\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Axios report<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in May, the Fed purchased $1.3 trillion worth of mortgage-backed securities during the pandemic, amounting to $2.7 trillion total on their balance sheet. As the Fed begins to sell off these assets, it will force the economy to slow and spur another increase in mortgage rates.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At the same time,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.housingwire.com\/articles\/mortgage-credit-availability-falls-0-9-led-by-shrinking-refis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">mortgage supply is decreasing<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;due to tightening lending criteria, particularly refinance loans.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The changing lending landscape challenges real estate investors, but those willing to bend rather than break may also find that it provides opportunities. We checked in with lending experts to find out how investors can prepare for potential interest rate hikes and react to changes in the housing market.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Impact On Lending<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Anticipation of the Fed\u2019s actions has just as much of an effect on mortgage rates as actual interest rate fluctuations, so consumer rates were already baked into the market before the Fed\u2019s announcement. Lending experts at&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.lower.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Lower.com<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;report that the pool of buyers has already changed in response.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cWe saw a lot of customers who have been dragging their feet on buying, kind of pull the trigger, or really get serious about it. It\u2019s almost pushed them further into the market because they just see the upward momentum of interest rates,\u201d says Chelsea Wagner, Senior Vice President of Partnerships.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Buyers are anxious to get into the market before it\u2019s too late.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">While interest rates and home values will continue to rise, competition has dampened slightly. A modest increase in inventory alongside a decrease in affordability has decreased the number of offers submitted on each home. Still, the average loan amount has remained steady, Wagner says.<\/span><\/p>\n\n\n\n<p>Buyers in the current real estate market are becoming more aggressive and offering higher amounts to secure their dream homes. This trend is driven by the increasing competition due to low inventory levels and the higher interest rates. As a result, many buyers are approaching deals with more assets and seeking <a href=\"https:\/\/www.biggerpockets.com\/blog\/appraisal-gap\" target=\"_blank\" rel=\"noreferrer noopener\">appraisal gap coverage<\/a> to cover the difference between the appraised value of the property and the agreed-upon purchase price. This strategy allows buyers to make more competitive offers, but it also requires careful financial planning and a solid understanding of the risks involved.<\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to Bill Lyons, Founder and CEO of <a href=\"https:\/\/griffinfunding.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Griffin Funding<\/a>, investors with different levels of experience have different reactions to the changes. While some less experienced investors are walking away from real estate entirely, more experienced investors are shrugging it off.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cMore sophisticated investors were not surprised,\u201d says Alex Bekeza, Loan Officer at&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/investorpropertyloan.com\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Investor Property Loan<\/span><\/a><span data-preserver-spaces=\"true\">, of the June rate hike. Rather than recoil, these more experienced real estate investors altered their strategies or sought deals that would still be profitable under the new conditions.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What We Can Learn From Professional Investors<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Full-time investors who continue to invest are finding creative ways to get favorable outcomes.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Lyons says he\u2019s seen investors use adjustable-rate mortgages to achieve a low enough debt-to-income ratio to make deals work. The lower interest rates on these mortgages during the initial fixed period allow for lower monthly payments. Additionally, Bekeza says he\u2019s seen an increasing number of investors maximizing the opportunity to buy down the rate with cash. This can help maintain a workable debt service coverage ratio.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">RJ Lindenmuth, SVP of Refinance at Lower.com, mentions, &#8220;Rates going up have helped people realize time is of the essence in this market cycle. And that goes for purchasing or refinancing.\u201d&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Lyons says it will be important to form a board of advisors for deals going forward. Contact your CPA, financial advisor, and loan officer to ensure everyone is on the same page with your investment strategy. Establish plans for how you\u2019ll proceed if interest rates drop\u2014and what you\u2019ll do if they climb even higher. Most importantly, educate yourself and your team about the ins and outs of real estate investing in a rising interest rate environment so you can adapt.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, Bekeza says some investors use mortgages with longer-term, interest-only periods. This sets them up to refinance at a lower rate later on if rates fall at any point. However, Bekeza says you shouldn\u2019t count on interest rates declining any time soon. In the meantime, he expects that investors will need to bring more cash out of pocket to buy down rates.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It\u2019s also essential to move quickly in the changing environment, says Bekeza.<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">&nbsp;BRRRR investors<\/span><\/a><span data-preserver-spaces=\"true\">, in particular, need to pay off their short-term loans faster and refinance into longer-term loans.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, don\u2019t rush the process so much that you fail to crunch the numbers. Plug in the current interest rate and ensure the numbers still work to achieve the internal rate of return you\u2019re looking for. One rule of thumb that may be helpful to remember is that a one percent increase in interest rates results in an approximately 10% decline in buying power.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can find a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/investment-calculators\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">BiggerPockets Real Estate Investing Calculator<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for virtually every strategy. Use these to see how a higher interest rate will impact your return and adjust your goals accordingly.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Be Prepared For Anything<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Given that mortgage interest rates are rising, you may likely find fewer deals that make sense when you run the numbers. This may require some extra patience and cause some frustration, but walking away from real estate entirely could mean missing out on some great opportunities.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Instead, check in with your loan officer, CPA, and financial advisor. Wagner recommends preparing for those conversations with detailed information about your budget and investment strategy. The more your team understands your situation, the better they\u2019ll be able to make suggestions on how to structure a deal to get the most profit.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Furthermore, be prepared with plans for various scenarios so that interest rate hikes won\u2019t catch you off-guard, and you\u2019ll be ready to take advantage of a decrease.&nbsp;<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">All the cash flow, none of the hassle<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Learn how to create financial freedom and passive income in real estate as a private money lender.\u00a0<em>Lend to Live<\/em>\u00a0makes passive income through private lending achievable for anyone. <\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/lend-to-live?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Lend to Live Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/rising-interest-rates-challenge-investors&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n\n\n<div id=button-custom-event-block_641384b1eb1d8 class='button-custom-event'>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/07\/lendtolive-cover-scaled.jpeg\" alt=\"lend to live cover\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Rising interest rates may be squeezing profit margins, but there are still deals that offer competitive returns, so the most experienced investors are forging ahead regardless. Rookies can learn from [&hellip;]<\/p>\n","protected":false},"author":613615,"featured_media":144047,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5528,7119],"tags":[10],"class_list":["post-144046","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-news","category-biggerpockets-daily","tag-interest-rates"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144046","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613615"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=144046"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/144046\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/144047"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=144046"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=144046"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=144046"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}