The Secret Reason to Invest When Interest Rates are High

Ever heard this one: “Real Estate is Cyclical”? Not really. It’s always changing, new things come and go, and the market is either going up or going down. It’s more like a wave. Up and down. It’s unpredictable. The investor is like a surfer, spending huge amounts of time scanning the horizon for the right opportunity. Like the surfer, the investor must find the right opportunity at the right time. A missed opportunity can mean more time waiting for the next one.

The market is changing, as it always does. Interest rates are high and only going to get higher. But I’m here to tell you: The high interest rate market is the best time to buy! It’s more expensive to borrow money now, so the cost of entry into real estate investing is higher. To many, they feel this prices them out, and they wait on the shoreline, hoping that the market will change.

What they miss is that when interest rates rise, all investors have to pay more for their loans. This means that they have to offer less and prices decrease. In the commercial arena, we say that the cap rates are increasing. An interest rate increase of 1% on a million dollar loan costs the investor an extra 10 grand a year. In order to make that work, he’s got to find that 10 grand somewhere in the numbers of the deal. That extra amount affects the cash on cash return and the investor needs to pay less for the property to make it work. When rates rise, values decrease. The investor still pays the same amount, it just shifts from being paid to the seller to being paid to the bank.

Now is the Best Time to Buy

Remember what I said about the best time to invest and plant a tree? That’s the obvious answer, but the secret is one specific to our market.

You need to do your due diligence on all your prospective deals no matter the market. Sure, the numbers will change, you’ll pay more debt service, but you will find that you pay less for the property. That will lower the monthly payments. But here’s the secret of why to buy now – the refinance.

Let’s say you pay a million dollars for a property, putting 20% down. You have done your research and realized you’ll have good cash flow despite a 6.5% interest rate. With 20 year amortization, you’ll be paying $66k in debt service each year. Your offer price was informed by the knowledge that you’d be paying that amount.

You buy the property and get to work. Your final cash flow ends up being no different than if you paid a 3.5% rate because of the sale price. The gravy comes in a few years when the wave of the market changes and interest rates go down. That’s the time when you strike.

You refinance down to 3.5% and suddenly you’re paying $56k each year, a savings of $10,000 that goes straight to your bottom line! If you had waited for 3.5% to buy, you would never have been able to do this. When you sell now, the property value has suddenly risen because investors can pay more due to the lower rate.

There’s value to be found in any market. You just have to think differently from other people. As Warren Buffet says – you should invest when others are running. Get up on that surfboard and make some deals. Now’s a great time.

Dr. Equity

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