Rate hikes, where to invest this year?

Question

Rates are still historically low at 5%, but affordability/price to income ratio is at all time low also, same level as 08 according to FERD website.

The same rental I bought last year at 3.5% in College Park, MD would not make sense to buy anymore this year at 6% rate because price went up along with rates. Rent is pretty much steady.

Where are you all investing this year? Rates are hurting cash flow, should I look into STR with high cash flow? Which market do you all think still has the huge potential and spread, Mid-West?

Would love to get you all’s opinion.

Nathan Grabau · Answer

While I agree that prices are excessive, I believe they are excessive for a reason. In Longmont, Colorado where I live, almost every house I see on the MLS is going for 10%+ above asking price, but there is a dramatic housing shortage in Colorado. I do not think the housing shortage will get any better especially with interest rates rising. Rising rates and inflation will put pressure on new constructions costs, and it will lead to people who have a low interest fixed rate mortgage that would consider moving choosing not to. Why would you move if just to side grade your house, you payment will be 20-30% more each month. These will both limit inventory more. The only thing that really can happen, unless we see a major economic slowdown is for rents and home prices to continue to rise. Home price increases will likely slow down, but rents, which compete with the cost of buying a new home, will likely move up dramatically.

If you are looking for a market that cash flow's better, I am invested in the Ames, Iowa area. I really like it because it has some of the cash flow characteristics of a mid west market, but does not have a declining population like many areas in Indiana, Ohio, and Michigan. It also is more an agricultural and food service hub than a manufacturing hub, so the jobs in the area cannot really be moved overseas. If you or anyone else want's to DM me, I am happy to refer you to my relator in Ames who owns 100+ doors, has a property management company, and helped me secure financing on my properties there.

Russell Brazil · Answer

Have prices ever dropped during a rising interest rate environment? No. Prices have only ever dropped during falling interest rate environments.

Why?

Simple cause and effect. Prices are the cause, and interest rates are the effect. Prices drive rates. Rates do not drive prices. The dog wags the tail. The tail does not wag the tail.

So when people call for a drop in prices due to rising rates....they are stating that something thats never ever occurred in history is going to happen. Yes there are first times for everything, however the probability of such we can predict. It ain't happeningm

Mike D'Arrigo · Answer

While I agree that the current rate of appreciation is not sustainable, I do not see a major downturn. I predict that the market will run out of steam and gradually return to equilibrium. High prices alone don't cause housing crashes. The housing crisis of 2008 was a perfect storm brought on by 3 factors. 1. Loose lending standards, 2. Robust growth of money supply in the economy and 3. High rate of new housing starts. Neither of these conditions exist today. Although interest rates have risen sharply in the last month, they are still below historic norms. In the last 50 years, rates never dropped below 7% until August 1993 and never broke 6% until December 2003. If anyone thinks rates are high today, all you have to do is look at where they were in the late 1970's and early 1980's when rates skyrocketed to as high as 18%.Amazingly, even at those rates, the housing market didn't crash and prices continued to rise. Below is a chart showing interest rates between 1975 and 1985 and housing prices during the same period. You can see that rates had little impact on prices.

Joe Hammel · Answer

@Henry Zhu

Metro Detroit

(my rental portfolio is here)

Purchase: $80k-$130k

Rent: $1200-$1450

ROI: Double Digit

Cash flow: couple hundred/month

Appreciation: Double digit (for past 10 years, will gladly send data)

Location: C, B-  (suburbs and certain markets)

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare and Auto industries.

The bad reputation comes from OOS investors wanting $20k D market properties.

Educated Investors retire (FIRE) in a few years off these.

We also have an agent on our team who is killing it with STR. With the auto executives and traveling nurses we have a pretty strong STR demand as well. She gets 70%+ occupancy.

Henry Zhu · Answer

@Colton Hahn

31% wow that’s amazing. Can you send me more details on that?

Henry Zhu · Answer

@Nathan G.

I would certainly love to find deals can weather correction, and that kind of deal definitely needs a lot of networking and searching to find.

Joe Miller · Answer

I love Columbus, Ohio. It is a strong market to invest in for both SFH and MFH. With so much growth over the past several years making it the fastest growing city in Ohio. Home of The Ohio State university bringing in over 60,000+ students yearly which is a strong backbone to the rental market. Columbus has the perfect mix of talented individuals, groundwork, and infrastructure that has been attracting big corporations from the west coast. Intel has just announced a 20+ Billion dollar investment being the largest private sector investment in Ohio's history creating roughly 10,000 jobs. It has cashflow as well as great appreciation.

Here is the article on the investment

Henry Zhu · Answer

@Russell Brazil

For DMV, I do still think price will keep going up. Still lots of high income earner that can afford them now Amazon has come here.

But on the other hand, I do see average people getting priced out, and for those who can’t afford anymore maybe they will be forced to move to cheaper areas.

Henry Zhu · Answer

@Brandon Goldsmith

Columbus definitely has been on my watch list.

Drew Sygit · Answer

@Henry Zhu

You might want to follow the "Deep Dive" series we're doing on our BiggerPockets blog about Metro Detroit cities, City of Detroit Neighborhoods and comparing Metro Detroit to other hotspots investors usually consider:

https://www.biggerpockets.com/...

Rate hikes, where to invest this year?

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