Is Real Estate Investment Prudent in Times of High-Interest Rates?
As interest rates have been steadily on the rise in recent times, prospective real estate investors and homebuyers have faced increasingly daunting challenges.
Whether you’re considering rental properties or planning to purchase a personal residence, the escalating rates have undeniably inflated the costs associated with these properties, unless, of course, you have the means to pay in cash.
However, while surging interest rates may pose obstacles to real estate acquisition, this doesn’t necessarily mean you should refrain from entering the market.
Timing the real estate market perfectly can be an elusive endeavor, and often, the best time to invest is when it aligns with your personal circumstances.
Despite predictions of a real estate crash, which have yet to materialize, it’s unlikely that one is imminent. The fundamental issue remains: the housing supply falls far short of demand, and high-interest rates are exacerbating this problem rather than alleviating it.
Have Elevated Interest Rates Resulted in Property Value Depreciation?
Investing in real estate during periods of high-interest rates does present certain potential advantages. For instance, decreased demand may lead to lower property prices in specific cases, rendering them more accessible to investors.
Additionally, rising interest rates typically signify heightened inflation, which could translate into faster rent increases compared to a standard market. However, it’s crucial to recognize that there are no guarantees regarding either of these outcomes.
While some markets, like Austin, have witnessed price reductions, overall property values are currently soaring higher than ever.
High-interest rates have not had a significant downward impact on prices because, although they may dampen real estate demand, they also curtail supply.
Individuals are reluctant to relinquish their low-interest rate loans, and builders reduce construction efforts. Personally, I’ve observed lower prices in the multifamily property segment, most likely influenced by the high rates. Consequently, there may be a few more investment opportunities in this sector.
In the long run, it is highly probable that elevated interest rates will increase the cost of real estate. The reduction in construction activity resulting from high rates ultimately diminishes inventory, which will inevitably exert upward pressure on prices. Betting on a substantial future price drop, particularly in the long term, would not be a prudent strategy.
Should You Invest Amidst High Interest Rates or Await a Better Climate?
When contemplating real estate investments during periods of high interest rates, there are more critical factors to consider than the interest rate alone. While interest rates undeniably matter, they should not overshadow all other considerations. Investors have operated successfully in high-interest rate environments for decades, both prior to and after the year 2000.
Here are several essential factors to ponder when deciding whether to invest in real estate amidst high interest rates:
Profitability of the Property: High-interest rates do not necessarily preclude properties from being profitable. In some markets or specific deals, a property may still generate positive cash flow even in the face of higher interest rates.
Investment Goals: The nature of your real estate investment matters. Whether you’re planning a live-in flip or a house hacking arrangement, there may be compelling reasons to buy now, particularly if you’re already incurring housing costs, whether through renting or buying.
Access to Great Deals: Securing great deals has been the cornerstone of my real estate investments. Ceasing investments due to high rates could mean missing out on numerous opportunities. Often, an excellent deal can more than compensate for the increased borrowing costs associated with high rates.
Financial Flexibility: Can you weather the storm of high rates? You might identify exceptional deals that don’t generate substantial cash flow now but could become highly profitable in the future if rents rise or interest rates drop. If you have the financial capacity to handle an asset that initially generates modest income or even incurs losses for a year or two, it might still be worthwhile to invest at present.
Investment Strategy: The impact of high rates varies depending on your investment strategy. House flippers may not be as adversely affected as long-term property owners. There is still robust demand for homes, and flippers can continue to buy and sell.
Potential for Rate Reduction and Refinancing: It is reasonable to anticipate that interest rates will eventually decrease. Such a scenario could enable investors to refinance their loans, significantly reducing their interest expenses.
This could transform a marginal investment into a profitable one or turn an ordinary deal into an exceptional one. While you shouldn’t bank everything on rates declining, it’s likely to happen at some point. The real question is when and to what extent they will decrease.
In conclusion, if you can secure sound deals that generate positive cash flow, there’s no compelling reason to avoid real estate investment at this juncture.
However, if you find it challenging to locate properties that yield profits or are reluctant to invest in the current market conditions, keep in mind that the investment landscape may not become more favorable anytime soon. For owner-occupants, the decision to buy should primarily align with your personal circumstances rather than being exclusively contingent on market conditions.