The impact of interest rates on real estate investments

HOW INTEREST RATES IMPACT REAL ESTATE INVESTMENTS AND INVESTORS

Interest rates significantly affect an individual’s ability to purchase residential properties, leading investors to assume that the deciding factor in real estate valuation is the mortgage rate. [1]

In real estate, interest rates refer to the cost of borrowing money to finance the purchase of property. They are expressed as a percentage of the loan amount and are crucial in determining the overall expense of a mortgage. When interest rates are high, borrowing money becomes more expensive, reducing demand for real estate and slowing down the market.

On the other hand, lower interest rates make borrowing cheaper. This can potentially stimulate demand and increase property values.

Interest rates could profoundly affect the value of income-generating real estate properties. That is why it is important to understand the relationship between interest rates and real estate investments.

HOW INTEREST RATES AFFECT MORTGAGE COSTS

When interest rates are low, borrowing money becomes cheaper. This often leads to increased demand for real estate as more people can afford to buy homes or invest in properties. Lower mortgage rates mean lower monthly payments, possibly making real estate investments more attractive.

This also means that higher interest rates can potentially dampen the demand for properties.

Interest rates significantly impact mortgage costs, monthly payments, and the overall expense of a loan. When interest rates are low, borrowers benefit from reduced monthly payments and a lower total cost over the life of the loan. [2]

While rate changes have no bearing on existing fixed-rate mortgages, which have the same interest rate and monthly payment for the entirety of the loan’s term, mortgage rates can impact the overall cost and monthly payment amount of new fixed-rate mortgages and refinance loans. [2]

For example, a decrease in interest rates can result in substantial savings on a 30-year fixed-rate mortgage. This is because the lower rate means that less of each payment goes toward interest and more toward the principal balance. For many buyers, this can make homeownership more affordable and accessible.

Conversely, when interest rates rise, mortgage costs increase as well. Higher rates lead to higher monthly payments and a greater cost of borrowing. This is because the interest portion of each payment increases, which can stretch a borrower’s budget and potentially limit their purchasing power.

Higher rates can even affect the housing market by quelling demand. Therefore, fluctuations in interest rates have broad implications for individual borrowers and the entire real estate market.

LOW INTEREST RATES: A NOON FOR BUYERS AND INVESTORS

Low interest rates can be a boon for buyers and investors for several reasons:

–   Cheaper borrowing costs: Lower interest rates reduce the cost of borrowing. This means that buyers can finance purchases at a lower cost, and investors can finance projects or acquisitions with less expense in interest. [1]

–   Increased affordability: For homebuyers, lower mortgage rates can make higher-priced homes more affordable or allow them to purchase more property for the same monthly payment. This can lead to increased demand in the housing market.

–   Higher asset prices: Lower rates can drive up the prices of assets like real estate and stocks. Investors often move money into these assets to take advantage of lower borrowing costs, which can push up prices. [1]

–   Greater investment in growth: With cheaper financing, businesses may invest more in expansion, research, and development. This can lead to job creation and economic growth. [1]

–   Boost to consumer spending: Lower rates can also make credit cheaper for consumers leading to higher spending on goods and services and stimulating economic activity.

–   Portfolio diversification: Investors might look for alternative investment opportunities if traditional savings and bonds offer lower returns. This can lead to diversification and potentially higher returns in other areas, such as stocks or real estate. [1]

However, it’s also worth noting that prolonged low interest rates can lead to potential risks, such as asset bubbles or reduced returns on savings. Balancing these factors is important for a buyer and an investor.

HIGH INTEREST RATES: CHALLENGES AND ADJUSTMENTS

High interest rates pose significant challenges for buyers and sellers in real estate.

Elevated rates translate into higher mortgage costs, possibly reducing a buyer’s purchasing power and limiting the range of properties they can afford. This can lead to decreased demand in the housing market, as potential buyers may be priced out or choose to delay their purchases. [3]

Additionally, higher monthly payments can strain budgets, making homeownership less attractive than renting.

As for sellers, high interest rates can make it more difficult to sell their property because fewer buyers are actively seeking homes. This means their properties may spend a longer time on the market. This may even pressure sellers into lowering their asking prices or offer incentives to attract buyers, which can impact their financial outcomes and market strategy. [3]

Buyers and sellers may have to adjust their strategies to keep up with high interest rates. Buyers might look for alternative financing options, such as adjustable-rate mortgages or government-backed loans, to mitigate the impact of high rates. They may also consider smaller homes or properties in less competitive areas to align with their budget constraints.

To stand out in a slower market, sellers may need to adapt by enhancing their property’s appeal through renovations or staging.

Experienced real estate professionals can offer buyers and sellers tips on navigating these challenging conditions and finding suitable solutions to meet their needs.

INFLATION AND REAL ESTATE

Housing is only one of many facets impacting inflation and causing prices to rise over time. [4]

Interest rates are a key tool central banks wield to manage inflation and stabilize the economy. Central banks may increase interest rates to make borrowing more expensive and saving more attractive as inflation rises.

This can help to cool down an overheating economy by reducing consumer spending and lowering inflationary pressures.

Meanwhile, if inflation is too low or the economy is struggling, central banks might lower interest rates to stimulate borrowing and spending, thereby boosting economic activity. By adjusting interest rates, central banks aim to keep inflation within a target range and ensure steady economic growth. See BAM Capital’s article about why “multifamily real estate is a great hedge against inflation.”

STRATEGIES FOR NAVIGATING INTEREST RATE CHANGES

Navigating interest rate fluctuations in real estate requires a strategic approach. Some investors lock in a fixed-rate mortgage when rates are low. This can provide long-term stability and protect against future rate hikes.

For buyers, securing a fixed-rate mortgage ensures predictable monthly payments, which helps them with financial planning and budgeting. This is especially helpful in a rising rate environment because it shields against the increased costs of borrowing that come with higher interest rates. [5]

On the other hand, if rates are currently high and are anticipated to decrease soon, it may also be advantageous to consider an adjustable-rate mortgage (ARM). This allows for potential savings if rates adjust downward after an initial period.

For real estate investors and sellers, the strategy might focus more on analyzing market trends and timing investments accordingly. Investors studying broader economic conditions and interest rate forecasts may determine the best times to buy or sell properties. [5]

High interest rates might lead to reduced buyer affordability, which could necessitate pricing adjustments or waiting for a more favorable market. [5]

Sellers might also consider offering incentives or negotiating terms to attract buyers deterred by the higher borrowing costs.

AN INVESTMENT OPTION FOR ACCREDITED INVESTORS: MULTIFAMILY SYNDICATION

Interest rates are critical in the real estate market, influencing everything from mortgage affordability to overall market activity. By understanding how interest rates impact real estate investments, investors and buyers can make more informed decisions and better navigate the market.

In real estate investing accredited investors have a few more options than regular investors. Their net worth, annual income, investing knowledge, and experience give them access to exclusive investment opportunities. Their financial sophistication is why the U.S. Securities and Exchange Commission (SEC) allows them to participate in unregistered securities. [6]

One such example is multifamily syndication. Most of these deals are exclusive to accredited investors.

Real estate syndication deals involve multiple investors pooling their financial resources to purchase a single real estate property. This makes a lot of real estate properties more accessible—even larger properties that are normally too expensive for a lone investor. [6]

A syndicator or sponsor arranges the syndication deal, handling everything from creating the business plan to executing it. They take on most of the responsibilities in the deal, serving as the general partner (GP). They handle everything: locating the investment property, conducting due diligence, securing the loan, finding investors, and managing the property once the deal is in place. [6]

Because the GP handles property management, investors do not have to worry about becoming a landlord. They can avoid all the headaches that usually come with owning a property.

Real estate syndication lets investors enjoy all the benefits of investing without the responsibility of property management. As limited partners (LPs), they have no responsibilities or liabilities in the syndication. They must only provide most of the capital needed to acquire the property and pay certain fees to get the syndication deal running. [6]

In exchange for their investment, LPs earn a share of the property’s rental income, and depending on the deal structure, they may also earn a percentage of the equity upon resale. However, every deal is different, so due diligence is still necessary.

Real estate syndication deals can be done with almost any type of real estate. However, multifamily properties are the most popular among investors because of the strong cash flow associated with them. One advantage of multifamily syndication is that multiple units provide rental income. Apartment communities and condominiums tend to be largely unaffected by vacancies due to the number of residents. If the property is well-located, there will be a strong demand, meaning vacancies will quickly be filled.

Due to the nature of multifamily syndication, it can be considered a true passive investment in real estate. Accredited investors can sit back, relax, and enjoy their investment.

Just keep in mind that even multifamily syndication has its risks, so making sure to choose a trustworthy syndicator is key.

WORK WITH BAM CAPITAL FOR THE BEST MULTIFAMILY REAL ESTATE SYNDICATION DEALS

Just like other real estate investments, multifamily syndication is still subject to illiquidity because these deals tend to last for years. Yet compared to regular investors, accredited investors are somewhat more comfortable with not having access to their funds because of their high net worth and income. They have the financial safety net to protect themselves if a deal is unsuccessful.

With that said, it is still important to work with a reliable syndicator since they will be the ones to make all the decisions regarding the investment property.

BAM Capital is an Indianapolis-based syndicator with a track record for excellence and has established itself as a leader in its industry.

BAM Capital is known for its award-winning strategy that can mitigate investor risk while creating forced appreciation. They focus on high-quality real estate properties with in-place cash flow and proven upside potential.  [7]

BAM Capital prioritizes Class A, A-, and B++ multifamily properties. They now have over $700 million AUM and 5,000+ units. [7]

This syndicator is also vertically integrated, meaning it can guide aspiring investors through every step of the syndication process, from acquiring the properties to renovating and managing them.

No investment is without risk. Consult an investment advisor and speak to a BAM Capital investment team member before making financial decisions.

Schedule a call with BAM Capital and learn how to enjoy passive income and all the other benefits of being in multifamily syndication as an accredited investor.

Sources:

[1]: https://www.investopedia.com/articles/mortgages-real-estate/08/interest-rates-affect-property-values.asp

[2]: https://www.experian.com/blogs/ask-experian/how-reduced-interest-rates-affect-mortgage-costs/

[3]: https://www.thecommunityvoice.com/business/how-interest-rates-are-impacting-home-buyers-and-sellers/article_e74115c6-28f0-11ef-bfa1-23c686d5606a.html

[4]: https://www.investopedia.com/ask/answers/correlation-inflation-houses.asp

[5]: https://www.kubera.com/blog/how-to-survive-high-interest-rates

[6]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[7]: https://capital.thebamcompanies.com/