Rising interest rates effect on Cap rates/value
I was listening to a podcast the other day that had some smart guys on it that said values should go down 5-6% for every .25 rise in interest rates. Would you agree with this? I can see the math of what they are saying however I still don’t see less capital coming into multi-family specifically because the lack of any alternative to invest in. If the rate goes up 2% then values go down 40% and in 5-10 years the bank is going to want to see a refi. I would think the fed would be scared to raise rates to quickly for many reasons not the least of which would be all these loans coming due. Do you agree that while the raising interest rates will “suck” it probably will not create to dramatic of an uptick in commercial foreclosures or am I off here?
Another question in an environment where values are decreasing due to interest rates how do you play that to your advantage? Outside of already being rich and buying things at the new normal/low prices.
As the costs of capital rise, the profit on an investment property will drop, all other things being the same. In order to keep the profit margin the same, the price would have to drop. Although very low rates have had an effect of increasing prices, I don't think they'll drop precipitously with a small raise, as long as the investments remain competitive with other uses of capital. It is a bit different with residential buyers of single family homes where it isn't the profit that gets squeezed with an increasing interest rate, but raw affordability.
I would agree that rising rates will not create a dramatic uptick in foreclosures, although there will always be some newbies who structured their deals in a way where they won't be able to afford rate hikes.
Other than being rich and buying things for cash instead of financing (or being the financier), you might use rising interest rates to your advantage in convincing someone to sell their property to you now instead of later when values may be lower due to higher interest rates.
I'm not an economist, my opinions are just amateur ones.
thanks for the response. Would you agree that having another argument for sellers is a poor substitute for falling interest rates.
The Dude abides!
Here's a good article about it, "Higher Cap Rates, Lower Property Values Not a Foregone Outcome from Interest Rate Hike"
http://www.costar.com/News/Article/Higher-Cap-Rates-Lower-Property-Values-Not-a-Foregone-Outcome-from-Interest-Rate-Hike/189511
@Account Closed, thank you for the article. Let's look back at this thread in two years and evaluate.