Deal Analysis in low interest rate environment

4 Replies

Hey folks, not sure if this is the right forum or if this is more of a "Business Plan" question, but figured I would start here.

I've been working through some longer term analysis to understand what it would look like to build out a sizable real estate portfolio over time. My view is that in order to really make this work, there is a minimum fixed cost of involvement (in terms of time and education) but it scales well, so it's efficient to do this in scale.

However, in doing that analysis, it's hard to project what profitable deals will look like if interest rates are materially higher than they are today. For example, a 10% cap property financed at 5% looks fantastic, if rates move up 3% you're not looking at such an attractive option.

Has anyone done any analysis of this situation? I imagine rents would also be rising in that environment, so it might be a bit of a wash, but really unsure. Thanks.

@Steve Katuska ,

Very good that you are thinking ahead to the eventual increase in interest rates. 

Your thought process is correct in that rents will most likely move with interest rates. E.g. If interest rates increase, it is more difficult to purchase/ finance a SFH, you have more renters (demand increase), prices increase. Along these lines, many variables will change as interest rates change. Market cap rates will also move. As you are analyzing, investors will be less likely to purchase at a 10 cap if interest rates increase.

While I think it is responsible and comprehensive to look to the future...you cannot dwell on it too much. I would build your analysis knowing what you know...and leave some contingency for the unknown. If you want to be extra safe, add a percentage point or two to the current interest rates in your analysis. This will ensure you are covered. 

@Steve Katuska , welcome to BP.

Anyone, what happened to 30 year FIXED interest rate loans? Any still around?...

I was pre-approved for 15 year fixed 3.95 with 20% down on a SFR. Probably only cash flow a hundred a month, but these are turnkey properties less than 10 years old in nice areas. I don't know if 30 year is an option to answer your question.

@Nick Baldo  that makes a lot of sense (linkage between rental demand and rising interest rates), and also to not get too ahead of myself. I think this will also push me a bit more towards fixed rate debt (as @Brent Coombs suggested), although it's just hard to make that trade-off well given the levels, a 7/1 ARM saves a couple hundred bucks a month vs 30 fixed, which would go a long way to either paying down the principle or compounding that cash flow into additional properties...

Thanks folks