What do rising interest rates mean for investors?

Question

With interest rates rising up to 6%, are you still buying long term rental buy and holds or are you hoarding your cash and waiting for the market to turn?

Ray Johnson · Answer

@Jo Gerrior I'm no longer purchasing but it's not just because of rising rates, I haven't been able to find any deals that fit my metrics since February, sure rates play a part in the overall equation but over-inflated price is playing a bigger factor.

One of the metrics I monitor is the Mortgage Origination report to see how people are paying for properties in areas I purchase in, when I see a majority of the buyers going away from fixed rate loans and using adjustable debt because buying power has maxed out due to asset cost increases and the only way the asset can be acquired is to get risky adjustable debt in a rising rate market tells me that opportunity is coming. I'm also seeing more 3/1, 5/1, and less 7/1 and 10/1 loan structures, that tells me rates are rising faster and banks don't want to be locked in at a disadvantage. This tells me that assets that don't have deep value adds available will be wiped out at some point in the cycle since rent increases won't outpace debt increases on the assets.

I see people closing deals at $100  a door on adjustable debt in a rising rate market.

I don't buy anything in the lower cost markets or in the Midwest or South where most assets don't require loans over 180K per unit so I'm not sure what's happening in those markets.

Alexander Felice · Answer

6% is not very high in the grand scheme of things. It will certainly slow many buyers, but won't stop people from buying. If someone can't compete at 6% how are they going to do business when rates are 8%, or 10%?

margins of real estate have been outsized for a long time, and that low interest rate environment we've been in is neither sustainable or the norm. Meaning, there is no reason to think we will ever have rates as low as they were, so waiting for that to come back is no strategy at all.

on single family homes with fixed rates and low balances, rate rises don't matter so much. On large loans with variable rates or short term readjustment periods it will make a much larger impact. The biggest impact from rates won't be on an individual deal, it'll be the painful trickle down effect of shrinking margins on large debt holders.