Plans for when interest rates go much higher (7% and up)?

Question

As we all know, interest rates have been historically low. Eventually (although likely several years away) interest rates wil creep back up into the 7-10% range of the late 90’s, and, God forbid, the 12-18% range of the early 80’s. What’s everyones plan in this case? My thought is that rent will go up and prices will go down to compensate, but I wonder how much. This seems to put a damp on people who would be acquiring properties at the time, either straight buys or BRRR’s. Who was investing in the 80’s and 90’s with these rates? How did you compensate?

Joe Splitrock · Answer

@Tyler Lee rates are manipulated by the federal reserve to help stimulate or cool the economy. They were held low after the crash to spur spending and recovery. Now they are being increased to cool the economy so we have sustainable growth.How were the 90's? It was an amazing period of economic expansion after the recession of the early 90's. I had money earning over 8% in an FDIC CD. I purchased my first home in 1999 and locked into a 7 7/8 % interest. We were so happy because of the crazy low rate we secured. We refinanced twice after that. Here is my advice:1. Do not refinance any loans if you have locked into a great rate. Forget BRRRR, it in a climate of quickly increasing rates, low interest loans are like gold. 2. Do not pay off loans early. I have 3.5% loans with 20 years left on them. I will be able to make over 3.5% in a CD within less than two years. CD rates today are 3% for 7 year term.3. Get more loans. I just locked in at 5.375% for a 30 year loan. Sounds expensive, but will be cheap over the term. If rates drop, I just refinance, no big deal.What if rates "God forbid" run up to the 12-18% range? I will throw a freaking party and laugh to the bank every single day, as I watch my double digit returns pile into my FDIC insured accounts. Rents will continue to increase and CAP rates will need to adjust to be competitive with the banks. That doesn't mean prices go down, but likely they flatten. Remember rent increases OR price decreases will increase CAP rate. Houses follow different rules and price is often more related to new construction costs, so land scarcity, material and labor costs drive up house prices.

Russell Brazil · Answer

Prices didnt go down when rates were at those levels before.Rising rates are a reaction to inflation. Housing prices going up are a high factor of inflation. Rates don't drive housing prices, housing prices drive rates.

JD Martin · Answer

Personally, I think it's unlikely rates ever get back to what you're suggesting. Housing and its subcomponents is such a major part of the economy at this point that it would be a serious drag on investment. I think the Fed would be comfortable if 30 year rates hung out in the 6% range, more or less. I don't think mortgage rates have been over 10% in a very long time - I got a mortgage in 1994 and it was 8.25% and rates have only come down since then. That was almost 25 years ago. Higher mortgage rates will certainly be more of an issue for those funding/refinancing rental properties in areas with flat or declining rents. In high growth areas it won't make much of a difference. It will certainly skim a lot of margin players out of the game altogether - if you're making $100/unit and rates go up by a percent, and you can't raise rents correspondingly, you're breaking even or losing money (on future deals, not what you've got locked in).

Dennis M. · Answer

Do like they did in the 80’s and buy on land contract Aka seller fInancIng . When things get rocky you just get creative

Ray Johnson · Answer

@Tyler Lee My plan is to look buy at a discount the properties that were acquired in the last 2-3 years that will be resetting on those 5 and 7 year terms, but were bought with minimum cash flow in hopes of appreciation, property upgrades that didn't occur or raised rents that didn't occur leaving the owners with a negative cash flowing properties after the debt resets. There will also be those with large expenditures occurring as well. These are things that currently take place in the market however I'm expecting them to happen in larger volume when rates continue to increase.I've been monitoring the mortgage origination reports and over the last 15 months investors have increased purchases using 3, 5, and 7 year terms in order to be able to acquire the properties. This tells me that a lot of buyers are buying this way to make the cash flow numbers work, if the numbers won't work on fixed rate debt today many of them won't work on fixed rate debt in the future of a rising rate market leaving some owners forced to sell at a discount to get out or hold a losing property for as long as they can.On the commercial acquisitions, I expect to see a smaller pool of opportunity however the same risk factors mentioned in the 4 and under unit property class will also exist in the commercial property class as well there's just more liquid competition from the small Syndication pools to absorb those deals, I'll only participate in Mid-size Syndications once rates reach a certain point as that is the best strategy for me.

Scott Morongell · Answer

@Tyler Lee long term fixed rate debt!

Seth Rouch · Answer

@Tyler Lee Personally I would be surprised to see rates get in the double digits. Granted I’ve not been at this for decades as some, but in terms of house prices alone the debt to income ratio would knock out a large number of buyers and stifle the housing economy. As the average price of a house is significantly more than in the 80s and even 90s, tacking on a 10%+ interest rate would make payments unaffordable for too many. Even these small 25 base point increases are knocking people out of the housing market. Anyway, just my 2 cents.

Theo Hicks · Answer

Focus on securing long-term, fixed rate debt now and avoid secure debt that expires by the end of my business plan.But if interest rates rise, I would continue to conservatively underwrite deals and submit offers on ones that meet my return criteria. The only difference would be the % I input into my "interest rate" tab.

Caleb Heimsoth · Answer

@Tyler Lee. For starters I plan on making some cash purchases, so rates don’t matter. Second I will probably invest in more private notes as higher rates in theory mean higher private notes. Even if it’s not higher, if I borrow money at 7 and make 12 percent return, I’m not sure that spread is enough for me. Anything in the 9-11 percent range is good for me as I’m young and have a long time horizon. I’d rather have a slightly lower return in exchange for a safer, less risky investment

Jason Hirko · Answer

Lock up all the long-term fixed rates loans you can right now as fast as you can!