Multiple Investments and Interest Rates

[Stephen Michael]

Hi All :)

I am new to the whole world of property investing and the Bigger Pockets community.

It is common to hear many success stories of people with 10+ properties. Noob question but I was wondering what investors do when there is rising interest rates? Would they be selling some properties to service the additional payments if their cash flow goes low or negative?

Thanks

[Chris Mason]

The hype surrounding rates matters 10x more than the actual rates. When CNN says "rates are up," people start to get picky about their purchases because "if I can't  have a sexy rate, I at least want a perfect property." For someone looking at investment grade real estate (almost always a somewhat beat up property with value-add opportunities), this means less competition, and you being more likely to get the specific beat up investment grade property you want, rather than settling. That's a good thing. So what if your payment is $73.12 higher for a little while, rates will come down again (check the 4 decade trend since the 1980s -- if something happens once it's great, twice is a coincidence, 3 times we see a pattern, but consistently for 4 DECADES and it's hard to deny that there's a VERY high probability of it continuing for the foreseeable future... there is precedent for negative interest rates), refinance at that point. 

This isn't all hypothetical, in 2018 rates hit a 7 year high water mark, a non-trivial bump in the overall 40 year pattern. Owner occ rates in the mid/high fours, investment property rates in the high 4s to low/mid 5s. Looking at that list of names/places in my database, it's just a bunch of real estate investors buying up Oakland and the East Bay. Smaller percentage of owner occupants. And, big picture, the rates really didn't matter.... 2019 was an excellent refinance opportunity relative to 2018, and 2020 relative to 2019.

Also, for the record, re: "prices will come down a bunch!" -- 2018 still saw appreciation in the bay area. So if you think rates going up 0.5% is going to automatically cause prices to fall 0.5%, there's no guarantee of that. I once in a while read someone assert a 1:10 relationship, that if rates go up 1% then values will fall 10%. I have never seen any actual evidence of anything remotely similar to a causal relationship like that being the case. "But, but... 2009!" -- if you think values dropping in 2009 had to do primarily with fixed interest rates on A-paper loans going up a tick, you weren't paying attention in 2009. :)