How do most investors feel about how increased interest rates will impact the R/E Investing market? Rates up over 1% takes away a significant portion of cash flow making there little to no cash flow at market rental rates... Investments always look better 3-5 years after purchasing but wanted to see how the community is reacting to the increase in rates. Mostly talking 2-4 unit properties, but open to the larger discussion as well.
Specialist · Indianapolis, IN · Member since 2021 · 312 posts · 282 votes
4y
Higher rates will also push more people out of home-buying, which will increase rental demand! Underwriting will be tight, but in many markets, the macro trends are pushing rents up significantly, so picking your markets is as important as ever.
How do most investors feel about how increased interest rates will impact the R/E Investing market? Rates up over 1% takes away a significant portion of cash flow making there little to no cash flow at market rental rates... Investments always look better 3-5 years after purchasing but wanted to see how the community is reacting to the increase in rates. Mostly talking 2-4 unit properties, but open to the larger discussion as well.
Hi Ryan,
The recent increases are definitely a pinch to the Cashflow situation. The numbers are the numbers so don’t push it to the limits. I have found some success in providing more premium feel / experience to my units which allow for greater rents. However I am focused primarily on SFR townhouses.
love to know where / how you are finding quads for sale in the twin cities?!?
Investor · Minneapolis, MN · Member since 2019 · 129 posts · 210 votes
4y
I'm not in the market currently but if I was, I would be tightening the belt. Everyone knows the 1% rule, but when interest rates were at 3% often time you could get pretty good cash flow at below 1% properties (obviously dependent on all your other line items as well). The issue now is that at 5+% interest you do probably need to be back at the 1% rule or higher, but property prices have still gone up in 2022 and haven't seen any adjustment in the twin cities yet, and while rents have gone up they've still lagged behind housing prices, and definitely housing affordability (aka monthly payment) by a lot.
Other things you can look at is having multiple outs or strategies at play for you. Maybe you buy a marginal cash flow deal but the price is below market for the area so you know there's a an equity spread if you can fix it up and rent it at market rates or above. I don't like buying for appreciation where you're relying solely on the market to boost your price, but if you're forcing appreciation through a remodel and you have the comps to support the new value, then that's a much larger driving force to creating wealth than cash flow on it's own. Or maybe you buy near a hospital and fix up/furnish your unit so you can rent to travelling nurses, that's another higher cash flow option as well. I would always run the #s conservatively so look at current market rents for long term rentals, in case you find you want the investment to be more passive.
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
4y
I am confused @Ryan Herickhoff, yes inflation means purchase price is a bit more, interest rate is a bit more AND rents, rents are more also.
Looking at it all from a purely "evil" Capitalist view point on REI, inflation is AWESOME-sauce buddy!!!! Why you say.... Simple math my dear Whatson! Profits are made on investment real estate in a %percentage% based metric. Increase the #'s, and with the % remaining static, you-earn-MORE.
And here is the thing, your speaking ONLY of NOI, the actual immediate cash-flow on rents, AND making an argument of rents NOT adjusting too inflation, which is nutz first off, regardless, it's completely ignoring the APPRECIATION of that property due to that little saint with horns called inflation (remember, purely evil capitalist vision here).
So here is the reality, your cost per unit is FIXED, inflation does nothing to your cost per unit, your operational expenses yes go up, but that's a minimal impact, the bank doesn't send notice saying "oh, inflation, that home you bought for $250k, yeah, inflation, we are now making it $300k, sorry dude, love Wells Fargo" doesn't happen right. So, your unit cost is fixed, which is lions share of your expenses. BUT RENTS, those go up 100%, unless your just the doofiest of landlords and let people rob you blind in which case, I am happy to lease your unit at a fixed price for the next 99 years and sublet it.
BUT, but but buttttt.... That property value is going up what, $35k over last few year, or double that. And it's TAX FREE if we use our heads and do a 1031 or heloc or what-not, and we get to use that $ to buy MORE properties who also earn us more actively and passively.
So what do I say to inflation, I say BRING IT, because I know how to use that energy for profit and advantage.
2009 was no different, it wasn't. People were saying the exact same thing, how can anyone make any $ with prices collapsing. In 2012 people said how can you make any $ with R.E. sitting in bottom of the pit. Name your economic cycle, people played Eeyore's favorite tune "everything sucks, nothing works, it's all miserable, everything is bad....". It just ain't true. Maybe you feel blue, maybe your sky is falling, it sure as heck is not the case for the rest of us moving WITH the market and going where the opportunity is.
Specialist · Indianapolis, IN · Member since 2021 · 312 posts · 282 votes
4y
Higher rates will also push more people out of home-buying, which will increase rental demand! Underwriting will be tight, but in many markets, the macro trends are pushing rents up significantly, so picking your markets is as important as ever.
Higher rates will also push more people out of home-buying, which will increase rental demand! Underwriting will be tight, but in many markets, the macro trends are pushing rents up significantly, so picking your markets is as important as ever.