According to a recent article in the New York Times, a sustained period of rising interest rates “is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.”
People have short memories – it was not that long ago that inflation was in the double digits. This risk of inflation is an excellent reason for investors to be very cautious about the kinds of financing that they use to purchase and hold real estate. Although there are some great bargains out there right now, you have to be quite certain that the effects of rising rates won’t make your mortgage payments unaffordable in the future. While the federal government has moved heaven and earth to keep rates low, this kind of dramatic interventionism can’t last for ever. Plus, there is the little matter of the money that our government spent on the bail out, but which not yet paid for. (A year ago, the Milken Institute estimated the costs of the federal bail out at almost 10 trillion dollars.) Ultimately, the only politically palatable way to reduce the pain of paying back these borrowed dollars will be to allow more inflation to creep back into the financial markets.
The well-recognized trend toward inflation and higher interest rates should spark renewed interest in one of my favorite forms of real estate investing – the one to four unit residential income property. Why such small properties? Because conventional 30 year fixed rate financing at historically low rates is still widely available for smaller properties, they are uniquely suited for long term ownership in a rising rate environment. Unlike larger commercial property owners, savvy owners of small investment properties only have an upside to an inflationary economy – rising rents — while dodging the bullet of higher mortgage payments.