Real Estate Investing Amid High Interest Rates

Common wisdom tells us that if you’re looking to sell a property, you should wait until interest rates come down, as this will ensure you get the most out of your investment. As such, when the Fed started increasing interest rates in 2022 to tame rising inflation, many put real estate investing on hold. The result is that real estate inventory is down, either because companies aren’t building or sellers are sitting on the properties they have until rates improve. However, this is a big mistake because investors are missing out on big opportunities that could be far more fruitful than what they’d get from waiting things out.?

People need to realize that interest rates aren’t the hard standard of value that we often think of them as. More important are “effective interest rates,” which are the real returns on an interest-paying investment when the effects of compounding over time are taken into account. Effective interest rates are the more important factor here because a property will very rarely see the same rates when you look to sell it a year from now. Even still, mortgage rates continue to be one of the biggest hurdles for potential homebuyers looking to enter the market , even as they dip periodically.

Many investors are hesitant to buy because of high home prices and the fear that they’ll be “locked in” at comparatively high interest rates . However, this is not the case: most mortgages have a prepayment term, offering a chance to explore refinancing when the term is over. Refinancing not only eases financial strain but sets the stage for increased earnings over time. Some people only think about the properties they own in the short term, but real estate is all about the long game.

Consider this: we’re used to interest rates of roughly 2-3%, but when you factor in the Fed’s rate hikes and consumers taking out loans, this has increased to roughly 6-7%, with the 30-year fixed mortgage average hitting 7.21% in early March 2024 . These highs have given everybody cold feet on buying or selling as they wait for rates to drop. Yet with high inflation also in full effect, people are moving out to more affordable satellite cities, which largely lack the necessary inventory to keep up with demand. Everything is coming together to create a major buyer’s market in the near future, and with competition currently low - which reduces the risk of bidding high there’s a long-term opportunity here for those able to see beyond the first few years. And as long as rental income exceeds mortgage payments, profitability prevails.

Of course, some are still hesitant to invest due to various economic factors, but while the real estate market has taken some hits since it peaked in late 2020, it has remained a consistently strong investment. The U.S. homes saw their value increase by $2 trillion in 2023, reaching a total of $47.5 trillion as of December. Even during the worst of times, the U.S. real estate market sees trillions of dollars trade hands every year, making it one of the most stable assets you could invest in. After all, during times of instability, people move their money to hard assets, which usually means real estate and gold.

So if you’re considering investing in real estate, don’t wait for interest rates to come down, because your competition certainly won't! Rather than treat high interest rates as a roadblock, see them for what they are: an invitation to strategic investing. While they may require short-term costs, a savvy investor can easily turn a property picked up at a high interest rate into a profitable future sale through refinancing and patience.