Changing interest rates impact real estate investments in multiple ways. Not only do interest rates affect your return on investment, but they also cause larger market shifts.
Here’s a quick look at:
- How interest rates affect your investments,
- Current rate trends, and
- Smart strategies for dealing with higher inflation than we’re used to.
Looking for a deep dive into interest rates, check out our detailed article on interest rates and real estate investing.
How Do Interest Rates Affect Real Estate Investments?
Interest rates affect real estate investments in three key ways:
1. The Cost of Financing
Higher interest rates increase the cost of financing, making mortgages and other loans more expensive. This increased cost typically dampens buyer demand. And this means less buyer competition and greater negotiating power for the buyers who remain in the market.
Lower interest rates decrease the cost of financing. This encourages more buyers and investors to enter the market, often leading to increased demand and more buyer competition.
2. Property Values
Property values are generally inversely related to interest rates. When rates rise and demand decreases, property values tend to stabilize or decline. This can be a good opportunity for investors to buy properties for less than they would be worth under low interest rates.
Conversely, low interest rates can boost property values by incentivizing more buyers to purchase homes while the cost of borrowing is low.
3. Rental Yields
High interest rates may lead to higher rental yields. This is because fewer people can afford to buy homes when rates are high, so more people are looking to rent. Investing in rental property can be particularly lucrative during periods of high interest.
When rates are low, we typically see the opposite. Increased home buying reduces rental demand, which can soften rental yields. Of course, with lower interest rates, investors don’t need to charge as much in rent to cover their holding expenses.
What Are Interest Rates Doing Now?
Mortgage interest rates in the US have been trending downward recently. As of mid-September 2024, the average ratefor a 30-year fixed-rate mortgage is around 6.2%. This is down from a high of 7.8% in October 2023 and 7.2% in May of this year.
These declines are thanks to lower rates of inflation and expectations that the Federal Reserve will reduce short-term interest rates. If the Fed decides to cut rates further, mortgage rates could continue to decrease into 2025.
Today’s rates are high compared to the historic lows of the long recovery period from the housing market collapse of 2008. But our analysis of interest rates over time shows that today’s rates are still lower than average. Let’s not forget about those double-digit rates of the 1980s!
Steal Our Strategy: How Gatsby Manages Higher Interest Rates
Want to know how to manage higher interest rates? Here’s how the professionals at Gatsby do it.
Purchase at a Discounted Price
Knowing that our interest expense will be higher when interest rates are up, we pad our margins. Purchasing properties at below-market values allows us to reduce our overall expenses so we can maintain strong returns.
And how do we get properties below market value? Well, we have a few strategies. First, we find unconventional off-market deals. Since these properties are not listed on the open market, there is less competition, so we have greater negotiating power. We often focus on distressed properties with highly motivated sellers who are willing to let the property go for less than it’s worth. We also rely on our network of real estate brokers and agents to alert us to potential below-market deals.
Add Value
When interest rates are high, expensive turn-key rentals are less appealing. Instead, we often buy properties we can add value to and sell quickly to recover our investment. This reduces our long-term interest expense.
Single-family home flips and multi-family developments are both strong options for adding value and getting fast returns.
Watch for Future Opportunities to Refinance
While we always factor interest rates into our vetting process, we don’t want to pass up a great opportunity just because rates are higher than normal, especially if the higher rates have resulted in lower prices! So we take advantage of these opportunities as they come and continuously track interest rates so we can refinance when rates dip.
Build Your Real Estate Portfolio with Gatsby
If you want to build a real estate portfolio that makes smart use of interest rate changes, invest with Gatsby!
Our pre-vetted deals are available to all accredited investors (even if you live outside of California or even outside of the US). You get to leverage our industry expertise to make the most of your real estate investments. And because we handle every detail of every deal for you, you get to enjoy the benefits of real estate investing without the hassle, time commitment, or high upfront cost of traditional real estate investments.
Don’t let higher interest rates prevent you from building a profitable real estate portfolio! Explore our unique real estate opportunities and place your investment today!