Rising interest rates make renting unrealistic?

Question

Is rehab/rent a less realistic strategy now?

Russell Brazil · Answer

Rates are high because inflation is high. What happens to rents when inflation is high? Rents rise. But rents are always a trailing inflationary measure because people are locked into leases. So rents will catch up, it will just take the time of leases ending, turnover happening for the rents to rise accordingly.

AJ Exner · Answer

Hey Daniel,

I have found with my clients that it makes the region that they are investing in really important. Finding creative financing is one thing, but if you have properties that you can find properties cheaper, add good value, have a market that sustains and has good ARV comps, and then has good stabilized rents has become pretty difficult.

I'm seeing good work in areas where Section 8 is an option as well. I'm seeing a few more stabilized bridge programs as well to refi and hold for a bit to see what rates do. The issue is not just the rates, but the rates in combination with areas with higher property taxes or in an area where insurance costs are too high (See Florida/The Gulf).

So yeah, more than anything just being aware of the average rent in an area to get an idea of good properties to rehab. It benefits to think backwards in the sense of thinking rent/value first in a good area and then thinking about the purchase/rehab and making that work.

Peter W. · Answer

I’ve bought my first property which closes at the end of the month. I predict to be slightly in the red for the first year or two. However the previous owners did a lot of quality work, so I expect my actual capital expenses to be lower for the first couple of years. It’s an okay deal at 8% but if I am able to refinance into the 5-6% range in 3-5 years I predict being quite happy. It’s a 160k house I predict will rent for 1900-1950/mo. Rent minus piti is 350ish.

Nicholas L. · Answer

@Daniel Matthews

BRRRR is more of an equity strategy than a cash flow strategy right now.  But every deal is different.

Dominick Johnson · Answer

"Is rehab/rent a less realistic strategy now?"Not at all, I'm still finding deals. It depends on your area. With interest rates high, less people can afford to buy, which increases the amount of renters. Now is the time to buy, not when the interest rates drop. Less competition with other buyers, and more people needing to rent. Then when interest rates drop, refinance and increase cashflow.

Logan Singleton · Answer

With rates where they are currently it is definitely more difficult to find deals that will cashflow, but talk to your lender and see if they offer I/O payments this will definitely help with cashflow and then in a few years if rates come down refi into a P/I loan product.

Steven Wesolowski · Answer

While yes, rental rates correlate to our nation's inflation (hence housing is a major component of the CPI), it does not mean that rentals are becoming unrealistic. Down here in San Antonio, TX,(of course, the cheapest major city market in Texas right now), we're finding a lot of buy/hold investors leaning towards heavier discounted off-market properties since demands to sell remain constant. Buyers have been able to off-set rental difference in the multifamily units, so that they're still attracting longer term tenants. Although not a frequent occurrence across the entire city, It's been nothing but good news for renters looking to find affordable housing despite rising interest rates. So, they're out there. Multifamily investors will continue to grapple with how to increase affordable housing in the face of rising rents, but property, rehab, and rent remain crucial to the success of any multifamily investment.

Account Closed · Answer

"Is rehab/rent a less realistic strategy now?"

Yes.

Here's something to consider. They'll loan you 30 years of debt to up your ears for the purchase price of a property (with talk of 50 year mortgages perking up now, like in the UK, to further extend the problem).

You can't borrow 30 years of your future to raise money to pay rent.

Daniel Matthews · Answer

Thanks all. It sounds like I should just find real distressed, small properties, rehab them and rent them out. Just charge higher rent to offset the higher payment I'm making to the lender.

I remodel kitchens, baths etc for a living so I could fix them up myself. Also, even in a full gut, an 800-1200 sq ft property just needs less material than larger homes.

Looking for that first one.

Rising interest rates make renting unrealistic?

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