What will happen when interest rates go up?

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What will happen when interest rates go up?

Adam Jaken
Investor · Woodland Hills, CA · Member since 2016 · 51 posts · 12 votes
Hi guys and a happy Sunday to you all! I am predicting the rental income will go up as soon as interest rates go up. The reason I came up with this conclusion is because when interest rates go up it will make it harder for people to purchase a property for the price range they are looking for, in essence it will push people to rent.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

I think the market will fall apart and we will enter a deep recession and potentially a huge crash

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    I think the market will fall apart and we will enter a deep recession and potentially a huge crash

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  • Brandon Battle
    Real Estate Agent · Buena Park, CA · Member since 2016 · 743 posts · 424 votes
    9y
    It depends on how high the rate goes.A small increase will be absorbed and the market for home sales will remain steady.Only a major increase coupled with more strict loan qualifications would injure home sales and increase rental demand.Can't live in fear,work your plan for today and tomorrow.
    3Reply
  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Jay Hinrichs don't be so bleek!  @Adam Jaken I'm interested to know what empirical evidence you have to support this claim?  I'd like to read up on it.  Thanks.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Shawn Ackerman  I was just pullin the BP leg.. small rise is expected and market will be fine

    repeat of early 80's rates and all bets are off

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  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    LOL!!! @Jay Hinrichs only someone who's been around the REI game for so long can speak the way you do. Yes, I hear things were tough in the 80's. Jay. What do you think caused the high interest rates at that time?

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  • Charlie John
    Investor · Twin Cities, MN · Member since 2015 · 130 posts · 111 votes
    9y

    @jay

    This is do misunderstood by many people! A 1% rise in interest rates is essentially a 10% reduction in purchasing power by the future homeowner. Interest rates are begging artificially suppressed by monetary policy. The fed will be forced to raise those rates otherwise the market will  on its own. (Who really knows anymore since the whole deal is rigged). It all has to do with debt service. Especially on us government debt.

    Jay is right.  When this happens the demand side(collapse) will overpower these low inventory supply levels. 

    Idk. I'm not a doomer since I believe that anyone can find a bargain in any market, but... This is the overpowering trend that will touch the market at some point. 

    2Reply
  • Adam Jaken
    OP
    Investor · Woodland Hills, CA · Member since 2016 · 51 posts · 12 votes
    9y
    Jay Hinrichs Wow your pretty blunt about that. Another recession?
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  • Adam Jaken
    OP
    Investor · Woodland Hills, CA · Member since 2016 · 51 posts · 12 votes
    9y
    Shawn Ackerman Hi Shawn, here you go sir. http://m.huffpost.com/us/entry/9909692
    2Reply
  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    Thanks @Adam Jaken The Huff post is reputable.  I'll thumb through the article.

    1Reply
  • Neil Patel
    Newport Beach, CA · Member since 2016 · 19 posts · 8 votes
    9y

    Thanks @Adam Jaken very interesting article as I do know the value of properties go down but the rental income should help if you're primarily in the market for cash flow.

    1Reply
  • Adam Jaken
    OP
    Investor · Woodland Hills, CA · Member since 2016 · 51 posts · 12 votes
    9y
    Shawn Ackerman I would love to hear your point of view after reading it. :)
    0Reply
  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Adam Jaken you got it.

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    When interest rates go up money becomes more expensive and properties cash flow less.  Money is harder to get your hands on as people can't afford it.  When rate hikes start, it will test the economy and if it really recovered since 2008.  A healthy economy can work well with rates in the 6-7% rate.  If it gets shaky in the 4-5% range, that is not good.  If it has to go higher than 7% that is not good.  

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Ian Walsh  Hard money rates never change  or at least very much and usually only come down in competitive markets like California.

    I think homeowner loans as the rates go up  ARMS become more popular.. lenders will find a product they can keep selling.. 

    also markets will dictate if rates move and buyers balk... and mortgage originations go in the toilet.. that usually brings mortgage rates back down.. but we will see

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  • Matthew A.
    New Haven, CT · Member since 2016 · 90 posts · 99 votes
    9y

    If the economy was better Yellen would have raised the rates already. The stock market should not be an indicator of how we are doing. Quantitative Easing anyone??

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    What will happen when rates go up?

    1. Unless rents go up concurrently, buy & hold will be less attractive for those using leverage, as the spread between costs and income will be smaller.

    2. In some markets it will create more unsold properties. Some of those properties will be reduced in price to encourage sales, some of them will be taken off the market, and some will be converted to available rentals. 

    3. In other markets, it will create upward pressure on rentals, as people who previously may have been potential property owners now become (or remain) renters. 

    There's no national answer to what will happen when rates go up. If you are in the right area, and already own a bunch of rental property f&c or locked in to fixed rates, you could make out like a bandit. If you are in the wrong area, it could bring more empty houses into the supply of rentals, depressing the rents you can charge if you already own or are looking to buy. 

    What's the answer? Plan accordingly. If you are in an area that is already struggling economically, you may want to retrench or redeploy capital elsewhere. If you are in a strong growth area, you may want to begin buying more property. 

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  • Rick P.
    Rental Property Investor · Grand Haven, MI · Member since 2015 · 71 posts · 108 votes
    9y

    There are a million different ways this could play out in the future.  First, from a macro perspective we have had exactly one hike since June 2006.  The entire world is in a race to zero and beyond as evidenced by the amount of paper trading at negative yields around the globe.  I find it hard to believe we're going to see a massive uptick in inflation in the near future which would warrant raising rates.  We have tons of slack in the labor market (low labor force participation rate) and technology is having a deflationary impact on growth as it increasingly takes the place of low skilled labor and makes its way up the value chain.  

    Now, as to how I am approaching this as an investor.  With current properties I have been able to get my lenders to move to 7 & 10 yr money on multifamily on 20 yr Amortizations.  This is something I have really aimed to do in lower tier, cash flow areas.  Previously everything I had was 5 & 25.  I think if I do get caught by an interest rate move this will help my portfolio withstand it.  

    In closing, I think the Fed is behind the curve some and they know they have to raise a few more times because they need to have dry powder for the next downturn.  However, they don't want to raise when the rest of the world continues to cut.  It's really a tricky situation and I actually believe we are more likely to see interest rates go negative in the next 5 to 10 years than we are to see an appreciable rise (plus 3.5% fed funds rate).  

    Good luck to all and interested to see how other investors are playing this.  

    2Reply
  • Michael Medinger
    Real Estate Agent · Oceanside, CA · Member since 2016 · 28 posts · 22 votes
    9y
    Originally posted by @Shawn Ackerman:

    LOL!!! @Jay Hinrichs only someone who's been around the REI game for so long can speak the way you do. Yes, I hear things were tough in the 80's. Jay. What do you think caused the high interest rates at that time?

    When President Carter appointed Paul Volker as chairman of the Federal Reserve in 1979, he had one mandate: curb inflation. And so he set about doing precisely that by jacking up interest rates to crazy levels, which had the intended effect of curbing inflation. It was a great time for savers (can you imagine getting 10% on a cash deposit?) and a hard time for borrowers. My parents bought their first house in 1983 and carried 16% APR on their mortgage.

    It was a bad time for international markets, however.  Google "Latin American Debt Crisis" some time.  The short version: countries like Brazil, Argentina and Mexico were carrying massive development loans from IMF/WB on floating interest rates.  When global interest rates followed T-Bills on a fast upward trajectory, these countries defaulted on their debts.

    In today's global economy, when a country like Greece even sneezing in the general direction of a default can cause money institutions to panic, it makes me wonder how these same institutions would react to an interest-rate-related cascade failure due to interest rate hikes.

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  • Cary F.
    Investor · Lakewood, OH · Member since 2016 · 203 posts · 191 votes
    9y

    @Adam Jaken 

    Well if rates go up, then money will be more expensive to borrow. Haha...

    I wouldn't bet on much change in rent price when we're talking about 25 bps changes at a time. That's essentially no change in rates. 

    0Reply
  • Danny Grey
    Investor · La Jolla, CA · Member since 2016 · 66 posts · 169 votes
    9y
    Originally posted by @Shawn Ackerman:

     The Huff post is reputable.

    Lol.

    1Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    9y
    As rates go up lenders will have more incentive to enforce "due on sale" clauses.
    0Reply
  • Mark Choi
    Real Estate Agent · New York City, NY · Member since 2016 · 26 posts · 7 votes
    9y
    Serious question here. Wondering since my RE education started in June. I'm more curious what would happen to real estate investors, in particular, when the dollar collapses. So that I can understand, can anyone tell me what would happen to my hypothetical syndication deal situation: Six multi-family apartments: 800 total units Combined purchase price of $30M 80% of it have been provided by Fannie Mae or other loans. All in emerging markets. Cashflow after taxes:$976,564 I have 0 of my money in any of them, because I syndicated the deal and own only 25% of cashflow and and appreciation for each of the properties. 1) When the US dollar collapses and a new currency becomes the world standard, what happens to these properties and the owners? 2) Do we lose them? People still need to pay rent, so just as the banks get their monthly payment, would anything really happen? 3)Don't you have to own the property free and clear in order for it not be affected by it? PLEASE! No opinions about the dollar collapsing here. There are plenty of other places in the web for that. I would LOVE to hear from those with a large portfolio and have actually studied about the hyper-inflation and the collapsing of the dollar. (If you're just guessing, please state so.)
    0Reply
  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    9y
    Originally posted by @Mark Choi:

    Serious question here. Wondering since my RE education started in June.
    I'm more curious what would happen to real estate investors, in particular, when the dollar collapses.

    So that I can understand, can anyone tell me what would happen to my hypothetical syndication deal situation:

    Six multi-family apartments: 800 total units
    Combined purchase price of $30M
    80% of it have been provided by Fannie Mae or other loans.
    All in emerging markets.
    Cashflow after taxes:$976,564

    I have 0 of my money in any of them, because I syndicated the deal and own only 25% of cashflow and and appreciation for each of the properties.

    1) When the US dollar collapses and a new currency becomes the world standard, what happens to these properties and the owners?

    2) Do we lose them? People still need to pay rent, so just as the banks get their monthly payment, would anything really happen?

    3)Don't you have to own the property free and clear in order for it not be affected by it?

    PLEASE! No opinions about the dollar collapsing here. There are plenty of other places in the web for that. I would LOVE to hear from those with a large portfolio and have actually studied about the hyper-inflation and the collapsing of the dollar.
    (If you're just guessing, please state so.)

     I'd say staying on the topic for the thread is more interesting and interest rates rising some is a much more likely scenario to happen

    1Reply
  • Chris Low
    Investor · Redding, CA · Member since 2016 · 180 posts · 102 votes
    9y

    @Jay Hinrichs I sure hope you're right!

    "Hard money rates never change or at least very much and usually only come down in competitive markets like California."

    0Reply
  • Andrew E.
    Investor · Member since 2016 · 54 posts · 21 votes
    9y

    Simply put if federal interest rates go up it will cost more money for banks to borrow money from the fed and the cost will be passed down to the borrower. Since the banks want to profit they will have to raise their rates. I imagine private lending rates will rise also because if the normal bank rate is 9-10% private lenders would need to raise their rates to compete or loose borrowers. Regardless of what happens the housing market will fluxuate up and down. Just hope to catch the next low. Just my thoughts.

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