Thriving in a High-Interest Climate: Ingenious Strategies for Real Estate Investors
What are you doing to minimize the impact of higher interest rates on your investment real estate?
As the Fed starts slowing its interest rate hikes, investors are still dealing with the impact of higher rates on investment real estate purchases. Many have decreased the number of properties purchased because of uncertainty.
I want to share some of the ideas I’ve seen for riding through this.
The reality is that, for a new purchase, the interest rate doesn’t matter so much, as long as it has a positive cash flow.
However, there’s a catch.
Sellers would have to lower their selling price to enable a positive cash flow, all things being equal. And, frankly, they don’t want to do that. A year ago, interest rates were lower than cap rates in my area. That made a positive cash flow relatively easy without leaving lots of money sitting in the deal. Now, interest rates are higher than cap rates.
So, what are your options to have positive cash flow? I have a few ideas.
1) Get a loan with a lower LTV and refinance in a few years. This may be a good option if you have the extra cash to leave in a property. In the extreme, you can pay cash. I prefer to leverage my capital with other people’s money. So, I would avoid this option. But, it is a conservative way to ride through higher interest rates.
2) Find a value-add property. Finding and stabilizing a value-add property is not for everyone. It’s a lot of work and good deals can be tough to find. But, this is where the best returns are found.
3) Get a loan with an interest-only period. The payment will jump, possibly substantially, once the principal repayment begins. However, this can help you ride through the higher interest period so you can refinance with a lower rate. Note: There is speculation in this approach, which I don’t typically advise. This method assumes interest rates will decrease. If they do not, you may be faced with higher interest rates that cause negative cash flow. Some private lenders are waiving pre-payment penalties for these types of loans.
What ideas have you seen to deal with the higher interest rates for new purchases?
𝐇𝐚𝐩𝐩𝐲 𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠!