How to cope with the high interest rate?

Question

After enjoying 3.4% interest rate over the last five years, I'm now confronted with the challenge of managing a 6% interest rate in the coming year. This is a source of significant concern for me. Moreover, the rate of rent increases hasn't kept pace with these economic shifts. As a result, I'm left pondering how to adjust to this changing financial landscape. I'm considering whether it's wise to sell some of my assets or navigate a substantial reduction in cash flow. It might even be essential for me to explore full-time employment opportunities to ensure my financial stability.

Sam Yin · Answer

@Kelvin Lee

Firstly, 6% is now a becoming a fantasy. It's closer to 8% these days.

To cope with rising rates, you just need to work the numbers backwards, using the current available loan rate. This would likely mean either a lower price offer or a higher down payment, as well as more creative terms. If it does not jive, move on to another deal.

Like it or not, that's what you have to do because the price of debt matters. When veteran investors say the rates do not matter, what they mean is that they adjust the other parts of the formula to get the desired outcome.

Kelvin Lee · Answer

Believe me, I've been pushing the rates as much as I can. The main drains on the cash flow are the turnover and the costs associated with renovating the property.

Kelvin Lee · Answer

Portland has recently gained national attention due to issues such as homelessness, drug problems, gun violence, and rising crime rates. In addition to these concerns, the implementation of new taxes for initiatives like 'Preschool for All' and 'Metro Supportive Homeless Services' has pushed Portland into one of the top three highest tax rates in the United States. As a result, many people, particularly those in the upper middle class, are choosing to leave the city. Similar to what has been observed in Seattle and San Francisco, property values in the core areas of Portland have plummeted.

The question now is, how long will it take for the city to recover? One potential starting point for this recovery is to address the influence of entrenched liberal ideologies and bureaucracy in city management and policy decisions. Once we tackle these issues, we can move forward with the revitalization process.

Carlos Ptriawan · Answer

lol

Almost think the reply is coming from time traveler :)

Eliott Elias · Answer

If your deal only cash flows with a 3% interest-rate, you need to reconsider your investment strategy. If your deal only cash flows with Airbnb, you need to reconsider your investment strategy.

Buying with a 20% cash on cash every month will keep you safe.

Michael Dumler · Answer

@Kelvin Lee, I would recommend double-checking your market's rental rates. Hopefully, you have been increasing rent each year... If not, that's on you.

Travis Timmons · Answer

I'm not sure where your property is located, but if it is in Portland, rents have increased dramatically over the last 2-5 years. We've seen it anecdotally in our property that we own there and in national stats. At one point in 2022, Redfin listed Portland as the highest year over year rent growth at 38%.

Every property and situation is different, but if you have not been able to increase your rents over the last 2-3 years to compensate for an increase in interest rate of 260 basis points, then it was a bad deal from day 1 or not managed properly (not enough rent increases over time).

Jaron Walling · Answer

@Kelvin Lee Are you already a full-time REI? If you don't have financial stability it's going to wear you down mentally. The answer to your question is asset specific. Assuming these are commercial properties on a 5-year terms I hope you bought it correctly 5 years ago. The NOI needs to support the higher rates.

I'm sure you're aware of this looming issue in commercial RE. Some players bought properties that can't support lower NOI and higher rates. When they refinance lenders will force them to inject $$$ into the property. Do you have the resources do that?? If these assets are in Portland selling would be MY LAST option. I hear it's a great market. The long term gains are worth the short term pain of less cash-flow.

Kelvin Lee · Answer

It will still generation cash flow but will never as stellar as it used to. With these near doubled interest rate, the cash flow will be reduced closer to halve.

Eliott Elias · Answer

They do not just lye around. They're cherry picked and catered to constantly to create.

How to cope with the high interest rate?

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