Investors who nervously watch interest rates rise and fall before making a move are missing a lot of potential opportunities. That’s because rates change all the time, and it does not serve anyone’s portfolio to get distracted by how rates used to be or to agonize over where they might be going.
The truth is, there will never be a cheaper time to buy than today.
Here’s a look at what interest rates mean for real estate investments, and why it makes no sense to prioritize them when deciding whether to buy, sell, scale, exchange, or grow.
Interest Rates Impact Mortgage Rates
California is perhaps the most expensive state in the U.S. to buy property. Real estate markets from San Francisco to San Diego are competitive, complex, and highly priced. That does not dissuade a lot of investors who understand the value of real estate assets in California, and interest rates should not diminish the enthusiasm for investing here, either.
Simply put, interest rates are the cost of borrowing money. Set by central banks like the Federal Reserve in the U.S., these rates are adjusted to control inflation and stabilize the economy. When rates rise, borrowing becomes more expensive, and when they fall, borrowing becomes cheaper.
For real estate investors, these fluctuations directly affect mortgage rates, and that’s what can spook a buyer or an investor. Higher interest rates mean higher monthly payments and reduced buying power. Property values can also be impacted. As borrowing becomes more expensive, fewer buyers enter the market, potentially causing property prices to decline. This can impact overall Return on Investment (ROI) because higher interest rates typically reduce cash flow and profits for properties financed with loans.
While these dynamics may seem straightforward, the reality is often more nuanced.
The impact of a high interest rate, for example, is going to be temporary. While there may be challenges involved in buying properties with more expensive mortgages, there are also opportunities, especially if other investors are shying away from the market. We lead investors through the options that exist during high interest rates all the time. If you’re worried or confused, contact us at Bell Properties. We’ll find a clear path forward.
The Effects of Rising Interest Rates on California Real Estate Investments
When interest rates trend upward, the changes can be felt across the real estate landscape. Smart investors are steady and still, even as the following impacts are felt.
Pressure on Cash Flow
For investors financing property through loans, rising rates lead to higher monthly payments, which can erode cash flow. This means a property needs to generate more rental income to remain profitable. It’s not as difficult as some investors might believe. Recently, interest rates have been higher but rents have been higher, too. Adapting to this situation by increasing rental yields has to be the immediate focus of investors whose cash flow is impacted by higher interest and mortgage rates.
Impact on Property Values
Buyers are often priced out of the market during a hike in interest rates. This is especially true in California, which, as we discussed, has a number of highly priced markets already. With reduced competition, property values may stagnate or even decline. This creates challenges for investors looking to sell.
However, it also creates dynamic opportunities for those investors who can afford and are prepared to buy. With less competition, it’s an excellent time to acquire new properties, the prices of which can be easily negotiated.
Hurdles for Fix-and-Flip Investors
Periods of high interest rates may not be the best time for investors who tend to focus on fixing up and flipping properties. Making a profit will be a little bit more difficult under these circumstances. For those who rely on short-term financing options like bridge loans for renovations, increased rates can significantly raise borrowing costs. The slimmer profit margins may mean careful adjustments to timelines and budgets.
Reduced Leverage
Rising interest rates may discourage investors from leveraging additional properties, limiting portfolio expansion. Borrowing costs may outweigh rental returns, signaling caution in further acquisitions. This does not mean it’s impossible to scale a portfolio or diversify into different asset classes. We can help plan for these moves, so contact us at Bell Properties if this is the direction you’re considering.
The Opportunities in a Higher Interest Rate Environment
It’s not all bad news for investors. It’s always a good time to buy. We talk about this all the time as your local California property management and investment resource. Remember that rising rates can also offer opportunities for savvy real estate professionals who understand their own investment goals, the fluidity of the market, and the understanding that interest rates will, eventually, start to drop.
There are Attractive Buy-and-Hold Opportunities
While higher rates might deter some buyers or keep investors quiet while they wait for lower rates, patient investors can take advantage of lower property prices. With the right strategy, securing rental properties when prices dip could yield substantial long-term gains. Let’s talk about how we can make this work; contact our team at Bell Properties.
Negotiation Leverage
Fewer active buyers can mean sellers are more willing to negotiate. Investors with cash on hand or lower financing needs can capitalize on getting better deals during this period. Anyone who wants to pay for a property in cash because rates are high will have a number of attractive opportunities in front of them. Even negotiating a more attractive price with an expensive mortgage will earn an investor money because refinancing is likely only a year or two away.
Enhanced Focus on Value Add
Investors can pivot to value-add strategies during high-rate cycles. This could mean improving underperforming properties or converting spaces (e.g., turning single-family homes into duplexes) to unlock new revenue streams. It’s time to think creatively when interest rates are high, and the investors who stand to gain will understand how to create additional value in the properties they own and rent out.
The Effects of Low Interest Rates on California Real Estate Investments
Conversely, a low-rate environment typically spells opportunity for investors. Just expect more competition and a huge buzz in the market. Investors who can remember the way everyone was buying and selling during the height of COVID and right after it will easily understand the way low interest rates can move a market.
1. There’s Cheaper Financing
Lower borrowing costs reduce monthly mortgage payments, allowing investors to increase their purchasing power and improve cash flow. Buying with a mortgage when rates are historically low will provide some easy equity early.
2. Owners Enjoy Higher Property Values
Easier access to affordable financing tends to increase competition among buyers, driving up property prices. While this benefits those looking to sell, it can create challenges when entering the market. We have seen fierce competition in the markets during periods of low interest rates. Buyers will out-bid each other and often end up paying more than the asking price for the right property.
3. Portfolio Expansion is Possible
Cheap capital often encourages investors to expand their portfolios or refinance existing properties to free up equity for new purchases. Again - everyone will be doing it, so be prepared to fight off the competition and have a solid plan that’s adaptable and flexible.
Key Takeaways for Real Estate Investors
As we discuss interest rates, we always stress the fact that the time to buy is now. Investors begin making money the moment they close. Whether interest rates are high, low, or in flux, preparation and strategy are critical for mitigating risk and seizing opportunities.
Talk to us at Bell Properties, and we’ll share some of our best strategies that are customized for specific investment portfolios and goals. Here are some of our general tips:
Run the Numbers. Always calculate how interest rate changes will impact any mortgage payments, anticipated cash flow, and ROI. Investors can use tools like mortgage calculators to simulate scenarios, but the best information comes from your local expert. Contact us at Bell Properties.
Diversify Portfolios. This is the time to focus on having a mix of high-yield properties and long-term investments to withstand market shifts. Create the type of portfolio that sails through any market conditions.
Stay Liquid. Having access to cash for unexpected expenses or new opportunities can be a game-changer, especially for investors who feel nervous about being over-leveraged.
Partner with Experts. Engaging with financial advisors, property agents, and loan experts can help investors make informed decisions tailored to changing markets. Contact our team at Bell Properties for the best advice and strategy.
At Bell Properties, we specialize in helping investors craft strategies that thrive in dynamic markets. Our team has helped clients approach any kind of market, whether it’s to acquire, sell, refinance, or conduct a 1031 exchange.
The relationship between interest rates and real estate investments might seem complex, but knowing how to adapt can create a wealth of potential for those who are prepared. Let’s prepare. Contact us at Bell Properties.
