Why a High Interest Rate Market Might Be the BEST Time to Buy Commercial Real Estate

[Fabian Quintero]

Most investors are sitting on the sidelines right now because of high interest rates. But here’s what most investors don’t know: Buying in a high-rate, high-cap-rate environment can set you up for stronger long-term returns than buying in a low-rate, low-cap-rate one. Here’s why:

1. Prices Are Lower

As interest rates rise, cap rates typically follow, and when cap rates rise, property values drop. That means:

• You're avoiding the intense bidding wars and inflated prices that were common just a few years ago.

2. Cash Flow Can Still Be Strong

Don't just look at the interest rate in isolation. What truly matters is the spread between your cap rate and your interest rate.Example:

• Cap rate = 6.75%
• Interest rate = 6.5%
  You’re cash flowing, even at high rates.

Now compare that to 2021:

• Cap rate = 4.5%
• Interest rate = 3.5%
  Low rate, but also lower returns. Same spread as today, yet cash flow is smaller because property income is lower relative to the price paid.

3. Better Financing Terms Down the Road

Buy now when prices are down. Then, when rates eventually fall:

• Your cash flow increases
• Your property’s value goes up (cap rate compression)
• You can refinance and possibly cash out equity tax-free

4. Less Competition = Better Deals

When most people are sitting out, you get:

• More negotiating power
• Motivated sellers
• Favorable terms and concessions
  

Final Thought:

Most people think, “I’ll wait until rates come down to buy.” But the better play is often to buy when others are fearful, then benefit from the upside later. "Date the rate. Marry the deal." If you underwrite conservatively, invest in strong locations, and focus on growing NOI, you'll be in a powerful position when the market shifts again.

Curious to hear how other investors are approaching today’s market. Are you sitting on the sidelines or actively looking?