Recent industry reports show US mortgage rates have surged to a 21-year high, making it harder for buyers to afford homes amid rising prices and low inventory. According to Freddie Mac, the average 30-year fixed-rate mortgage was 7.09% in the second week of August 2023, up from 6.96% a week earlier and 5.13% a year ago.
For many people, investing in real estate when interest rates are going up is a tricky affair. They would rather hold off and start investing when the Fed pivots again. However, this approach means you will delay your investment goals and probably miss out on tremendous upside.
Regardless of the prevailing market conditions, people will always need housing, meaning there are still plenty of deals out there waiting to be tapped. Being strategic about your investments can boost your returns even in these uncertain times. Our real estate agents in Los Gatos, California, provide six tips for investing in real estate during high inflation.
How does high interest impact real estate?
Whenever the US central bank raises rates, properties get more expensive to mortgage. This ultimately results in depressed demand from potential homebuyers and decreased seller inventory. On the other hand, a rise in interest rates could mean more people looking to rent out homes because they have limited options.
Six tips for investing in real estate during high-interest regimes
Here are some of the tips to help you invest in real estate despite market volatility:
Use interest rates as a weapon in negotiations
When buying an investment property, you will probably be concerned about the deal's viability and whether it will bring any returns amidst rising interest rates. With all the uncertainties surrounding your decision, it could seem awkward. However, remember, in an unstable market with rising interest rates, sellers might be more motivated to negotiate the selling price of a property. Higher interest rates decrease demand, giving you more room to negotiate a better deal. Ideally, sellers are aware interest rates could rise further, making it more challenging to get their property off the market quickly. You could use this pressure to your advantage by ensuring volatile interest rates are part of your negotiations.
Purchase a rental property
As interest rates climb to unprecedented levels, the American home buyers' purchasing power continues to plummet further. With prices of homes making buying complicated, many people will opt for renting since this is what they can afford at the moment. As an investor, this could be a unique opportunity to tap into. Purchasing a rental property can effectively maximize your returns, especially if you choose a long-term strategy. A rental property, such as a home or multifamily apartment in the ideal neighborhood, is an excellent investment that increases value over time while helping you hedge against inflation.
Maximize ARM and short-term loans
During these volatile times, it may be advisable to consider less strenuous financial options such as an adjustable-rate mortgage (ARM). An ARM has a variable interest rate that fluctuates over time based on a benchmark interest rate or index. With an ARM, the starting interest rate falls below the market rate and stays unchanged for a specified period. Once the specified fixed period lapses, the rate floats and readjusts accordingly based on the prevailing market rate. This can be a great tool to secure a lower interest rate in the short term and gain some predictability with your monthly payments.
It can also be a lucrative option when implementing a short-term fix and flip strategy that allows you to buy and sell a property before the fixed-rate period lapses. You can also use an ARM loan for your long-term investment strategy and refinance it once interest rates trend down. Here are some examples of adjustable-rate mortgages to consider:
It can also be a lucrative option when implementing a short-term fix and flip strategy that allows you to buy and sell a property before the fixed-rate period lapses. You can also use an ARM loan for your long-term investment strategy and refinance it once interest rates trend down. Here are some examples of adjustable-rate mortgages to consider:
- Interest-only ARMs: This type of mortgage allows borrowers to pay only the interest portion of their monthly payments for a specified period, typically 5 to 10 years. After this initial period, the mortgage typically converts to a fully amortizing loan, where the borrower begins to pay both principal and interest.
- Hybrid ARMs: A Hybrid ARM is a type of mortgage loan combining features of both fixed-rate and adjustable-rate mortgages. In a traditional ARM, the interest rate is initially fixed for a certain period of 3, 5, 7, or 10 years, and then it adjusts periodically based on an underlying financial index. Hybrid ARMs typically start with a fixed interest rate for an initial period, after which the rate becomes adjustable.
- Payment option ARMs: This is a type of mortgage loan that offers borrowers multiple payment options each month, such as a 30- or 40-year amortizing payment, an interest-only payment, a negative amortization payment, or a minimum payment.
Consider a serviced accommodation
While the traditional real estate investment approaches are profitable when interest rates are low, they may not be viable with rising interest rates. One idea that could give you a distinct advantage during these uncertain times is serviced accommodation. With this strategy, you can easily turn a low cash-flow single-family home into a profitable short-stay-let business. When you rent a property out on sites such as Airbnb, you make much more than renting them out long-term. Today, the range of clients for serviced accommodation, from holidaymakers’ contractors to relocators, gives you more options for higher returns.
Think long term
When property prices are volatile due to high interest rates, it is prudent to think long-term rather than short-term or medium-term. If you have bought a high cash-flowing property during the high-interest rate era, consider it a long-term hold, meaning you shouldn't be too concerned about month-to-month or year-to-year price changes. Adopting a long-term perspective allows you to live through short-term market fluctuations and benefit from the potential for higher returns over the long term. Short-term market fluctuations balance out over the long run, and your investments have a better chance to adapt to changing interest rate environments.
Invest in real estate investment trusts (REITs)
Investing in REITs could be an excellent strategy to profit from rising interest rates. An REIT is a type of investment vehicle that enables individuals to invest in real estate properties without directly owning them. They often own and operate income-generating real estate assets, such as residential properties like apartment complexes and commercial properties like office buildings, shopping malls, and hotels. One advantage of investing in REITs during high-interest regimes is that they are less sensitive to interest rate fluctuations than other investment options, such as stocks and bonds. Since REITs are required by law to pay shareholders not less than 90% of their taxable income in the form of dividends, you are assured of a steady income in the long term.
The Pulpan Brothers Group provides tailored solutions to match your investment needs
If you are looking for homes for sale in Los Gatos, Calif., and are considering a real estate investment, the current inflationary environment could provide unmatched opportunities. As the general price level rises due to inflation, the value of real estate assets may also increase, helping to protect your purchasing power. If you need help investing in the current market, contact the real estate experts at The Pulpan Brothers Group. We offer in-depth Silicon Valley real estate market knowledge and superior negotiation tactics that allow us to guide our clients through the crucial steps of buying, selling, and trading real estate. Contact us today to schedule a free consultation.
*Header photo courtesy of Crexi
*Header photo courtesy of Crexi
