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Rising Rates and RE Investment

Rising interest rates will undoubtedly have a massive impact on your investment unless you're paying cash. Even then, it likely gives you negotiating power.

The 30 year mortgage average now hovers 7% around up from around 3% at the start of the year. I have heard commercial rates are higher, though not as drastic. Regardless, The market has changed.

Going through the numbers on a property I was looking at earlier this year:

  • Purchase Price = $409k

  • Rent = $42k year

  • Operating Expenses = $12k year (includes maintenance, turnover)

  • Loan Payments: 15% Down, 4% Interest, 30 Years = $20k year

  • IRR Year 5 = 31%

Using that same scenario and changing the rate to 7%:

  • Loan Payments: 15% Down, 7% Interest, 30 Years = $28k year

  • IRR Year 5 = 20%

  • This excludes any rent depreciation that may take place if/when the economy weakens.

The increase in the cost to borrow turned an investment that was good to great into one that is on the absolute end of the acceptable return level for me. In order to generate the same IRR as earlier the year, I would need to pay about $325k for the house ~ 20% decline.

Some things to consider when purchasing a property now that we have higher interest rates:

  • Price paid is matters a lot more to hit your return targets

  • Quality of property (pricing power) is amplified even more as prices still remain elevated (for now)

  • If you can get a decent price on a quality property, you might be able to refinance in a few years, though wouldn't want to bank on that

  • New inventory will be slow to come to market (already seeing that)

  • Prices will come down (seeing early stages of that)

  • All the above means patience is key

The REIF Model helps you sort through all the variables so you can make an investment decision with confidence. As such, with rising interest rates you know exactly what you can pay for a property and still hit your target return parameters. Additionally, this can be done in 15 minutes.

I attached the sample above scenario in the REIF Model at 7% rates to review the model's analysis for yourself.

Key Data Rising Rates
Download PDF • 186KB


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