Interest rates are steadily on the rise, so how can you— as the savvy real estate investor— save your portfolio from these negative effects, while maximizing your profit? Let’s take a look at what you can do to change the way higher interest rates affect your real estate investments.
Fed Launches Rate Hikes
The Fed increased interest rates in December 2016, and promised that it will continue to raise rates (on occasion) in 2017. According to Fed data, mortgage rates have been floating at half the historical average, which is lower than one-fourth of their peak. Investors, agents, and lenders could be up against some surprising changes over the next eight to twelve months. These higher rates can have the potential to bankrupt some folks, so what can investors minimize the fallout that higher rates bring about?
The best way to sidestep costly borrowing is to avoid it all altogether. Expensive borrowing heightens risk especially if used carelessly. To change this, invest with cash instead. To invest with cash, you may need to search out more affordable markets to invest in; like Indiana or most places in Midwest. I (personally) am not a fan of investing with cash, due to the power of leverage. I view cash investing as a great option for those who hope to sleep better at night. You won’t have to worry about the mortgage payment every month. Basically, it boils down to your comfortability with risk as an investor.
Find A Partner
One issue with limiting yourself to cash-only investments is that it takes away one of the most advantageous aspects of investing in real estate— leverage. An excellent combo-option is to find a partner in other investors who have cash. For example, ten of you can put in $50k or $75k and get your hands on an income generating property to hold it together. Say, you have more cash to invest. Take that money and diversify your investments. This strategy will offer a catalyst for everyone to enjoy greater portfolio performance and lower risk.
If it’s a fight for you to have positive cash flow when interests rates are good, what will happen when the rates go up? What will happen is you will be in trouble. What will happen is that you will have to come up with the out-of-pocket cash to cover those mortgage payments! Buying at the right price is a critical component to cash flow. If the numbers don’t work when you test it, then you better walk away and find something else. Always stay objective.
If you are one with current debt attached to real estate, it’s an ideal time to refinance and restructure that debt. Find variable rate lines of credit to longer fixed rates while it’s possible.
2017 is already looking like an eventful and lucrative year for U.S. real estate. How much investors make will rest heavily on their leverage and the rates that they are forking out. Try out the above mentioned insights to lower your risk and maximize your bottom line. Let me know how it goes!