Rising Interest Rate. Will They hurt your Rental cash flow?

No doubt interest rates are rising. Rising rates could put some landlords in a precarious situation. A good investor keeps an eye on the situation and has a plan to deal with rising rates. A big factor in determining your profitability of your rental property is the interest rate. According to marketwatch.com rates rose to a four year high with a 30 year fixed at 4.32% as of February 2018. Interest rates have recently risen out of fears that inflation is on the rise. The increase might not seem like much but even small changes can be very expensive and rates can start rising rapidly if inflation takes hold. Most experts anticipate the Feds will keep pushing rates up for now, even if it is only to give them room to address a future inflation. If you recall, in the 2000’s rising interest rates was the main factor which forced the foreclosure debacle that swept the nation.

Now body knows how high interest rates will go. The interest rate is still relatively low given his historical averages. The average interest rate over the last four decades has been about 7.5% based on data from the Federal Reserve. If you had a $400,000 loan at 3.5% your principal and interest payment would be 1,796 a month. Let’s assume with repairs, vacancies, and property taxes you net $300 a month.

If you had to refinance or had a variable interest rate and interest rates were at the 7.5% average you’d end up with a monthly mortgage of $2,797. That’s $700 a month in negative cash flow. If you have several rental properties this could become a real problem really quick. An investor might have to start pulling money from savings or the day job to keep the afloat. A wise investor must have several exit strategies because the dynamics in the real estate market are always shifting. That’s also the reason an investor has to buy at the right price. A good guide to help you know if a potential property would be a good investment is to use the 50% rule. That rule is a guide to say that 50% of your gross rent will be used to pay for expenses such as repairs, insurance, vacancy, taxes, etc not including principal and Interest. If the property still has positive cash flow based upon those assumptions is might be a good property to consider acquiring. Another option might be to put a larger down so that you leverage is not so high. Another options might be to partner with another investor to minimize your risk especially if you’re a newbie. Don’t let the potential of raising interest scare you from getting involved. Just do your homework and know your numbers.  

Article original posted on Cash2seller.com