Is it ok to assume lower interest rates in the future?

Question

Is it ok to assume interest rates will lower in the future, not immediate future but eventually, when analyzing a potential deals CoC return. As of right now, a particular deal I'm analyzing doesn't have the best CoC return but the location and YoY growth is solid and if the interest rates drop in the coming years then the CoC return is solid. Thoughts? Im new to BP and real estate investing and Im looking to pop my first deal. Thanks!

Russell Brazil · Answer

I wouldnt assume that. Interest rates are still relatively low already compared to a normal interest rate environment.

Karl McGarvey · Answer

I wouldn't. You are artificially trying to make a deal better - if its not a good deal now, assume it will never get better and ask yourself if you can live with that. If it does get better and you can refi, great, if not, you still have the deal you locked into.

Chris Seveney · Answer

I would not assume this either but if it is in a location that is a great location and over time will appreciate, this does not mean its a bad deal. I am in the DC area and you do not initially buy for cash flow here you buy for appreciation and a rental that I had 7 years ago the rent rates have consistently increased as well as appreciation. So just because CoC is not super, it still does not mean its a bad deal

Bruce Woodruff · Answer

As @Russell Brazil said, they are really pretty low right now (historically speaking). But never assume anything in this game. Back in the 70s - 80s, it took a full decade or more for rates to get 'low' again.....remember the Fed can be political, too. Can you afford to wait 10 years for your investment to make money?

Leo R. · Answer

@Jeremy Melloul assuming any future outcome that you cannot control is essentially speculation--which is usually a bad idea (unless your speculation is just a tiny fraction of your net worth, and you can afford to be completely wrong).

For instance, Warren Buffet can afford to speculate on something with a $500k downside, because losing $500k is nothing to him...but, for a typical person, losing $500k on a speculative move could mean bankruptcy.

This goes for speculation on future interest rates, home values, rent amounts, etc.--don't speculate unless you can afford to be completely wrong and weather a worst-case scenario.

Personally, I would not buy a property unless the deal pencils out right now. I have little interest in risking my money on what * could * occur in the future (based on innumerable factors that I can't control).

As for interest rates specifically, most evidence suggests that they will continue to increase in the near term...what will they do in the long term? Nobody knows.

John Williams · Answer

I wouldn't try to predict rates (either in the short term or long term). Year over year growth is a bit reliable but I wouldn't bet the farm on it (past performance is not a guarantee of future performance). Does the investment cash flow today? And is there a significant margin to protect you form the downside?

If not, keep looking! Why take the gamble when there are other opportunties out there, with similar returns, that are not reliant on year over year growth and/or future interest rates?

I hope that helps!

Property Manager from Clarksville, TN

Matthew Irish-Jones · Answer

@Jeremy Melloul absolutely. Interest will come

Down at some point. Just like the real estate market will come down eventually. The only problem is no one knows when.

Best to make sure you can live with your current rate, and you can live with a higher rate of you are on a ARM.

Sergey A. Petrov · Answer

The deal should make sense now. If the return "isn't so great" but you are ok with it today, go for it. Any future rate adjustments to the downside will just make it so that you are even more ok with it. But if it makes no sense today, gambling on tomorrow isn't the best strategy. You could ask the seller to pay for some points to help bring your rate down.

Jim Pellerin · Answer

As someone said on another post, "are you an investor, or a speculator"?

Is it ok to assume lower interest rates in the future?

Is it ok to assume lower interest rates in the future?

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