Some investors may see an increase in interest rates as a reason to hold off on investing in real estate. Despite the fact investing in real estate in a rising cost atmosphere can be good. People will always want housing, and even though the industry conditions aren't the greatest, there are always people who want to rent a place to stay and people who want to buy a home.
Interest rate hikes can enable investors to make even more money due to the higher demand for apartments, and the seller's market conditions may give you room to work out better deals to be made when you buy. While in these conditions, renters are willing to pay more due to the increased demand for rentals and decreased supply.
How Do High-Interest Rates Impact Real Estate?
High Interest rates impact the market in four significant ways.
More buyers are priced out
Investors drop from the market
Demand falls
Prices fall
More buyers are priced out
As interest rates rise, more people are priced out of the market entirely or now need to buy less expensive homes as their same income now pays for less house and more interest.
Investors drop from the market
Because of the high-interest rates and the perceived higher market risk, many investors opt to leave their money in saving accounts and wait for rates to drop.
Demand falls
The fact that there are now fewer people buying real estate by necessity means there is going to be less overall demand, as demand is a measure of the number of people who want to buy.
Prices fall
Due to the laws of supply and demand, it is time for the high equilibrium prices we have seen over the past few years to end in many markets. As the fed put it, it is time for real estate prices to "normalize." With the lack of buyers, sellers become more desperate to sell property and are willing to drop prices and give concessions they would not otherwise give.
How to invest in these conditions?
There are many ways to invest in this type of market. But let's look at what has worked for us.
Buy cheaper homes in populated areas
It is certainly true that demand falls during these times overall but as buyers get priced out of larger, more expensive homes, some do drop out of the market but others just drop down a level. We listed a home in Sacramento, CA, for $250,000 and got multiple above-list price offers within a week of listing, even as other more expensive homes just sat on the market or had to take below-list price offers.
So contrary to what you may expect, demand can actually go up in certain property types or at certain price levels as the remaining buyers compete for the only homes they can still afford.
This strategy does not seem to work as well in lower population areas, typically with lower incomes, as there just are not enough buyers for this to take place reliably.
Buy for the long term
As most people who invest in real estate know, real property prices constantly rise over time. So because of the lower demand, you may able to get good deals; it may be best to just buy at a discounted rate and hold onto the property taking advantage of the better rental market while waiting out the storm. Once the market recovers, you can then decide what you wish to do with the property.
Consider creative finance
As the name suggests, you do have the option of getting, well, creative. You can do something called subject to contracts. There are a few ways this can be done and we will go into more detail with this in another post but what it is in simple terms is you find a home with a mortgage already in place and offer to buy subject to taking over the mortgage. You do not assume the loan but just make payments in place of the seller. The main benefit here is that you do not need to pull a new line of credit or go through the loan process. Another benefit that is the most important in this case is that these loans may have much lower interest rates than you could get today, meaning you can effectively go back in time and get a loan when rates were lower.
How THEUS Investments can help
If all these complexities sound like too much, you may consider letting someone else do the work. THEUS Investments is a crowdfunding website for real estate, among other things, where all the research and work is done for you, and you simply get paid your percentage once the work is done.
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