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

[Tyler L.]

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]

@Tyler L. 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.