What strategies work in a high interest rate market?

Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes

What strategies do you think work in today's market with high interest rates?

I'm finding it difficult to find rental properties that'll cash flow. I'd imagine most buyers can't or won't get a loan right now, since money is so expensive. That should, in theory push rental prices up. Do you see that happening in your neighborhood? At least not enough to cover the increase in mortgage.

I'm dabbling in creative financing (lease options, subject to, owner financing etc.). Any thoughts on how those strategies work in this market?

Thanks in advance!

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Jason Piccolo

Real Estate Agent · Arlington, VA · Member since 2014 · 78 posts · 37 votes

@Rachan M. we invest with passiveinvesting.com and Bronson equity groups.

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Gregory SchwartzBusiness Member
Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
3y
Seller financing or private money can be helpful when the bank's terms don't work for the inventory in your market. Reach out to your network and see who might be interested in a competitive interest rate with favorable terms (interest only, low down payment and low to no loan origination fees).
Its also a good time to sharpen your systems and maximize the cashflow in your current portfolio.
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Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
3y
Rachan, when rates are high I like to be the "bank." Currently buying first trust deeds paying over 9% which is a better return than most rentals now.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
3y
Just use a higher down payment to compensate for a higher interest rate.
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Anna Cerda
Member since 2023 · 26 posts · 5 votes
3y
Quote from @Eric Gerakos:

Rachan, when rates are high I like to be the "bank." Currently buying first trust deeds paying over 9% which is a better return than most rentals now.

Eric,
Who do you invest with in first trust deed investments?
1 Reply
Eric Gerakos
Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
3y
Quote from @Anna Cerda:

Quote from @Eric Gerakos:

Rachan, when rates are high I like to be the "bank." Currently buying first trust deeds paying over 9% which is a better return than most rentals now.

Eric,
Who do you invest with in first trust deed investments?
Send me a PM.
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Shane SiedermanPro Member
Investor · Charleston, SC · Member since 2015 · 39 posts · 17 votes
3y
In major Cities from NYC, Charleston SC and many of Florida's cities, rents up 20-30-40% for sure. Even if it came down 2-3% it has JUMPED, in coming months construction projects that started 1-2-3 years ago will be done and that tells me less and less inventory on markets, so rents will eventually go higher not lower. None of big boys building slow down and waiting for a collapse of some sort and labor prices to drop too! All signs to me rentals in major cities will track higher with less inventory on markets. Bottom line US government says inflation 5% LOL LMAO 1980's 40% of CPI was housing if last year most cities jumped by 20% of higher how the hell is inflation @ 5%..... Also letting more people come into the cities is not helping dislocation with prices.... inventory low and rents will head higher in most cities.... 31.8 TRILLION printing more money, cannot print houses can you?
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Paul V.
Investor · Denver, CO · Member since 2016 · 42 posts · 29 votes
3y
@Rachan M.. Are you looking for income or equity/wealth growth? My preference is to not try to time the market and dollar cost average by buying and holding.

Have you purchased an investment property in the past? What has your experience been?
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Quote from @Russell Brazil:

Just use a higher down payment to compensate for a higher interest rate.

Bad advice. People don’t just don’t have a higher down payment. Creativity goes along way in this market, owner, finance, and subject to will get you lower interest rates.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
3y
Quote from @Eliott Elias:

Quote from @Russell Brazil:

Just use a higher down payment to compensate for a higher interest rate.

Bad advice. People don’t just don’t have a higher down payment. Creativity goes along way in this market, owner, finance, and subject to will get you lower interest rates.

Zero chance of any of those strategies working in the market he is in, which is my market.
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Rachan M.
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Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes
3y
@Russell Brazil My question wasn't market specific but the platform made me choose a market. I was looking for thoughts and suggestions for what others are trying.

Thank you for your response @Eliott Elias.
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Rachan M.
OP
Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes
3y
Yes, I have purchased investments in the past @Paul V. but then the interest rates were low and they kept dropping for years. This is a different market altogether, or so it seems.

I've generally been a buy and hold investor, but no chance that's working in this market, and certainly not on the east or west coasts.

I've been dabbling in creative financing lately, things @Eliott Elias suggested above, but am new to it and here to learn.
Your question about income vs wealth is a good one too, to find clarity. I'd say, income since I'd like to quit my job and do RE full time.
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Paul V.
Investor · Denver, CO · Member since 2016 · 42 posts · 29 votes
3y
Quote from @Rachan M.:

I've generally been a buy and hold investor, but no chance that's working in this market, and certainly not on the east or west coasts.

Could you elaborate more on why thats not working in this market?

Unless your market is forecasted to have an oversaturation of housing and/or population decreases, I think it should work just fine for a long term approach.

It seems like cash flow is your primary metric for success.  Are you nearing your ability to replace your income from your job with real estate income? If so, then yes, you definitely want to hunt for strong cash flow.

If you are not close to that, then most people that I have come across focus on getting their highest Return On Equity to build their nest egg.. and then when nearing the time to retire, flip that equity into high yielding cash flowing properties.

Just my $.02 - hope it's helpful....
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John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
3y
@Rachan M.
Rent by the room. 2 out of my last 3 purchases lately are roomie houses. I average about 4k/month per house and net $1600-$1800 per house after all my expenses. If I rent to a family I’m only cash flowing around $300-$500 with today’s high interest rates.
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Where are you at ? Point A
Where do you need to get to? Point B.

what timeframe?

This will dictate the type of investments you go after.
Have the above challenge your thought process.

Is your market Washington DC? Use your markets strengths and weaknesses. If it is Bill, Wyoming do the same.

If you need to make $10,000 per month per unit come up with a plan. Find your numbers first. Then your plan.
3 Reply
Jason Piccolo
Real Estate Agent · Arlington, VA · Member since 2014 · 78 posts · 37 votes
3y
@Rachan M. have you looked into any passive investment opportunities from syndicators? ATM’s (24% per year) and car washes (7-10% per year plus upside on a sale potential) are offering pretty good monthly cash flow. The tax benefits are awesome and you can generate a nice monthly income stream. I started off buying condos and a townhouse in the DC area in 2001, but putting 25% down right now at these rates has crimped my cashflow.
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Rachan M.
OP
Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes
3y
Thanks @Jason Piccolo. What's a good resource to learn about ATMs, car washes etc?
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Jason Piccolo
Real Estate Agent · Arlington, VA · Member since 2014 · 78 posts · 37 votes
3y
@Rachan M. we invest with passiveinvesting.com and Bronson equity groups.
3 Reply
Ricardo Hidalgo
Real Estate Agent · Member since 2019 · 569 posts · 257 votes
3y
Quote from @Rachan M.:

What strategies do you think work in today's market with high interest rates?

I'm finding it difficult to find rental properties that'll cash flow. I'd imagine most buyers can't or won't get a loan right now, since money is so expensive. That should, in theory push rental prices up. Do you see that happening in your neighborhood? At least not enough to cover the increase in mortgage.

I'm dabbling in creative financing (lease options, subject to, owner financing etc.). Any thoughts on how those strategies work in this market?

Thanks in advance!

You have to find something to value add or build which requires capital. I am able to generate over 15% cash on cash return on my current investment with big renovation or new builds. Low leverage or little cash isn't going to work well in this market. Capital is king when finding deals in great areas!
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Rachan M.
OP
Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes
3y
@Paul V. house prices in DC have gone 3x in the last 10-12 years but rents have not gone up 3x. With the high interest rates, a new SFH investment won't cash flow.

Renting by rooms is good advice - that's what I've been doing for years.

I have a fair bit of equity built up, and am only a quarter of the way to replacing my W2 income with RE income. Can you elaborate on what you mean by 'getting highest Return On Equity'?
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Paul V.
Investor · Denver, CO · Member since 2016 · 42 posts · 29 votes
3y
Sure thing - Check out BP Podcast 662 with Chris Lopez

By far the most important metric for those in the equity growth stage

If you would like to model out your financial scenarios to determine ROE I would recommend running the numbers for your properties/portfolio over at propertyllama.com - Full disclosure I am helping them with their launch.
0 Reply
Jack Seiden
Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 654 votes
3y
Quote from @Rachan M.:

What strategies do you think work in today's market with high interest rates?

I'm finding it difficult to find rental properties that'll cash flow. I'd imagine most buyers can't or won't get a loan right now, since money is so expensive. That should, in theory push rental prices up. Do you see that happening in your neighborhood? At least not enough to cover the increase in mortgage.

I'm dabbling in creative financing (lease options, subject to, owner financing etc.). Any thoughts on how those strategies work in this market?

Thanks in advance!
You can buy and hope for continued appreciation to outpace the negative rental income (not a strategy I’m a fan of) you can put more down to get more cash flow at the risk of a lower coc return or you can put your money in a less interest rate sensitive sector such as stocks or bonds. Those are really your only options. The other options such a seller financing are extremely unlikely outside of the most depressed housing markets and/or massively overpaying for the sticker price of the property.
2 Reply
Becca F.
Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
3y
@Rachan M.

I have the same questions. I have properties in the San Francisco Bay Area but I'm not buying here with the extremely high prices and interest rates. The few investors buying long term rentals are paying cash, which I wouldn't do, and getting very negative cash flow for rent. I guess those investors are hoping for the historic California appreciation to continue in the future. Other investors are doing fix and flips - there are some homes with multiple offers by primary home buyers since there's low inventory.

I closed on a SFH in Indianapolis in March 2023. It's Class C, moving up to Class B. Conventional loan 6.99%. I used a mortgage broker who found me the best rate with low origination fees. Tenant is moving in soon. Projected cash flow $176 a month. My other properties are Class A. I really wanted to buy in a Class A Indianapolis suburb but I'll be in a negative cash flow.

I would have preferred buying in appreciation markets: Nashville Tennessee, Florida Panhandle (Navarre Beach, Fort Walton Beach, West Panama City), Arizona, Nevada or another California city but I'll be in more of a negative cash flow than a Class A Indy suburb. I also don't know those states whereas with California I could drive out to look and I used to live in Indy metro area. My own approach is that putting more cash down is not a good option because I'm tying up more money on a property.

Other investors living in expensive locations have looked at the Midwest: Ohio (Cleveland specifically), Detroit area (supposedly it's coming back), St. Louis, and Kansas City Missouri. Memphis has reasonable prices (I considered this city). I've heard Alabama also.

I'm considering fix and flip in Indianapolis to build capital. If I can get net proceeds of $30,000 to $50,000 in the Midwest after renovation costs, holding cost, and real estate agent commission I would be happy. Exit strategy is hold it as a long term rental if I doesn't sell and rent it out for a year or two. I think I need to find a private lender or do seller financing because buying with conventional loans with long term rentals doesn't seem the way to go now.

Is anyone looking at mid-term rentals to travel nurses or corporate professionals since rents are higher than long term rents? Thoughts on AirBnb arbitrage in certain markets?

2 Reply
Brad S.
Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes
3y
** Value adds - additions, renovations, development, reconfigure outdated floorplans/characteristics, etc.

Examples: Large 2 bedrooms house, convert to 3 bedrooms and/or add a 2nd bath without an addition, house with unpermitted conversion (enclosed patio/porch, etc), legally permit it to add sf for little cost.

fix/flip or build - Find distressed properties under market value (they are still out there, even now), demo and rebuild to modern standards, then sell and tfr that money to a cashflow property and put more money down with your new found profit. Then you can put more down and get cashflow, since you have "new-found" money.

Add ADU in markets that allow them, if done well they can bring in more than 1% cost/rent returns, and adding together with the main house purchase, it may contribute to reasonable cashflow.

Reposition a property in the market - find a stigma'd property and "un-stigmatize" it. Find a property with a marketing "issue" and devise a plan to fix the issue. ...can't think of a good example at the moment, but they are out there!

**Be Creative - Find someone who has good terms but needs to get out of their responsibility and do some creative deal transacting. Like you mentioned - lease option, owc, subject-to, etc

** rent by the room, str, mtr

People are speculating, if all they are doing is buying and hoping for appreciation. That worked well for a while, but now the tide starts to recede and we will see who is swimming naked.

Nothing wrong with speculating, especially if it is done with some well researched underlying data, but this current market and the potential upcoming trend/s don't seem to be the best time for it. This is more of a "create value" market, where skill will triumph over luck once again. Luck is harder to find these days.
3 Reply
Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
3y
@Rachan M.
are you located in the DC area?
if you're asking "what RE strategies still work anywhere in the US" - well, all of them still work. they're just all more difficult as you noted, and it's tougher to cash flow everywhere.
but I do think advice needs to be market specific.
so... where are you located? how many properties do you own? what are you trying to accomplish?
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Rachan M.
OP
Rental Property Investor · Washington, DC · Member since 2017 · 78 posts · 13 votes
3y
Hi @Nicholas L. yes I'm in DC. My goal is to increase cashflow to replace my W2 income, then do REI full time. I'm only 20% of the way there.
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