I am not sharing anything new when I tell you that we are *still* currently in a high interest rate environment. This is a trend expected to continue. Selenid and I just went under contract with a property and the interest rate on the mortgage is 7.125%. This is by far the highest of any of our properties. But we are still investing. And well. So how does this work? Well, I’m getting ahead of myself…
A high interest rate environment impacts physicians in a number of ways. From student debt management to procuring personal loans to real estate investing. Since entering this high interest rate phase, I’ve received a lot of questions like:
- Are you still investing in real estate?
- Should I still invest in real estate?
- Should I wait to start investing until the rates come down?
- What should I do differently?
These are all very reasonable and important questions to be asking. And the fact that you are asking them means that you are considering your investing strategy thoughtfully.
However, the best investing strategies, whether they concern real estate or not, account for changes in things like interest rates and other market conditions.
With this in mind, let’s review 5 rules for successful investing in a high interest rate environment.
5 rules for successful investing in a high interest rate environment
From the top…
1. Trust the numbers
This is the #1 thing that I stress in real estate investing in general. But it goes double for any time there is a market shift like this one into a high interest rate environment.
Whatever the market conditions and whatever market you are in, you should be investing in real estate based on your criteria, which is established by the numbers.
As a refresher, Selenid and I buy investment properties that have an expected cash-on-cash return of 10% or greater. If a property meets this criteria, we buy it. If it doesn’t we walk away. Emotion should not enter into the picture.
As you can see from this post on analyzing rental properties, your cash-on-cash return is based on a number of factors including your rental income and all expenses, including your mortgage.
And your mortgage payment will be dependent on the interest rate that you get for it. Higher interest rate equals higher mortgage payments. Higher mortgage payments equals higher expenses. And higher expenses equals lower cash-on-cash return.
But, if the numbers work with the current higher interest rate that you are receiving, then that means they still work. Don’t let one factor scare you off. Trust the numbers.
Selenid and I have seen our expected cash-on-cash returns go down by about 2-3% because of higher interest rates recently. But we are still buying properties if the numbers work.
And if the numbers don’t work because of a higher interest rate, don’t get discouraged. Which brings us to #2…
2. Be patient
The key to so many things, patience will serve you will in real estate investing. Especially during a time of adverse market conditions.
Because of higher interest rates, expected cash-on-cash returns will be lower than previous. We know this. So good deals will be more scarce. In reality, I think this scarceness is often overestimated. I heard the same things when purchase prices were skyrocketing. But Selenid and I stuck to the numbers and still found great deals like this one.
Regardless, expect ahead of time that you may need to look harder and/or longer to find a good deal. This is a great time to really emphasize your criteria with your investor agent. Then you can task them with finding and bringing you only good deals that meet your CoC goals.
Remember, real estate investing is for the long term. It’s a marathon, not a sprint. Don’t be fooled by those who present real estate as a quick way to reaching financial freedom. It certainly accelerates the path. But it’s not a get-rich-quick scheme. It’s more like a flywheel…
And lastly, interest rates and property prices tend to have an inverse relationship (but not always). With patience I expect prices to come down and have seen this happening in my market. As this happens, an equilibrium will eventually be struck where more deals are working in terms of the numbers.
3. Consider using a mortgage broker
A mortgage broker is someone or some company that works with many mortgage companies to find you the best mortgage for your rental.
It’s similar to life or disability insurance. If you work with just one mortgage company, they can only offer their mortgage products. But a broker can look at all the different products by different mortgage companies to get you the best one.
The downside is that there will be broker fees that increase your closing costs a bit. That’s why we used just one mortgage company for our first few rentals. However, we now currently use a local mortgage broker.
We find that we are able to find products with slightly lower interest rates using the broker that make up for the increased closing costs.
So, consider searching around for a broker. If they can find your better rates, then consider using them. If not, then stick with one mortgage company that you know and like. That’s our approach.
4. Use more cash
The more cash you put into a deal, the less money you need loaned to you. And therefore you become much less dependent on the current interest rate environment.
This works in two ways.
First, you can just put a larger down payment on the property. The higher the down payment, the lower the mortgage, and the less important the interest rate.
You can even play with the numbers to see how much or little of a down payment you need to make the numbers work.
The second way this works is by considering properties that need more initial work in terms of repairs and renovations. This way, you can buy the property for less given its relatively more distressed state. (Remember, however, that the property need to be “livable” to qualify for a mortgage so you can’t get too extreme.) With the lower mortgage, you are less dependent on interest rates. And then you can use cash to fix it up and rent it out. As long as you don’t refinance, your mortgage payments stay the same.
This is another great resource on this topic: Top 3 Ways to Buy Real Estate Without Debt
Again there are 2 qualifiers for this rule:
- You need to run the numbers and make sure they work and
- You need to have enough liquid cash
5. Set yourself up for future REI
In the current high interest rate environment, great deals are still out there. Selenid and I just closed on one such property and have another under contract. However, the deals are more scarce as we discussed above.
So, use this time to make sure you are right with all other aspects of your personal finance.
I am doing this by:
- Paying off my student debt even more aggressively
- Buying index funds while the stock market is currently on sale
- Using cash to purchase bigger items to avoid further debt
In a higher interest rate environment, all of these things become even more attractive. Plus, I expect to put less into real estate as deals may take longer to find.
Doing this also sets me up for future real estate success. The better my financial foundation, the better prepared we are to take advantage of great opportunities and deals when they arise!
What do you think? How have higher interest rates impacted your real estate investing? Has it deterred you from getting started? Let me know in the comments below!