Is your stomach turning every time the Fed raises their rates? You’re not alone. America is facing an affordable housing crisis; demand for affordable housing is high, but the high interest rate environment created by the Fed is producing gridlock when it comes to supply. You may be thinking it’s a good time to circle the wagons and wait out the storm. A defensive stance like so is not uncommon in times of economic uncertainty. But if history has a way of repeating itself (and it does), then now is the time to hunt for opportunity.
Here are smart moves to invest better when interest rates are high, with insights from two account executives and industry experts at Residential Capital Partners: Aaron Lester and Hunter McLean.
Buy Deeper and Hold the Reins
In a high interest rate environment, your cash flow margin shrinks due to the higher cost of capital invoked by the Fed. Don’t use this as a reason to sideline your acquisitions. Use it as a negotiating strategy to buy deeper! Explain to the seller that, truthfully, you cannot justify purchasing their property unless it cash flows.
Spelling out your need to cash flow in an earnest way can help you negotiate with both the seller and prospective tenants. In the words of Lester, “Have a strong understanding of your market and the rent you can command—all the way from macroeconomics to microeconomics. Know your market and the submarket of your neighborhood. And supply your prospective tenants with this information.” Making this information available to tenants will give you the power to hold the reins when asking for rent, rather than dropping the prospective tenant to accept a lower rental figure just to lease the property.
Focus on Appreciation
Building wealth through real estate is a marathon, not a sprint. You have to keep your eyes on the finish line while enduring the pains of the race.
Lester explains, “There’s an adage in the industry ‘date the rate, marry the property’. If you’re buying good properties in growing areas that have long-term growth potential, a slight fluctuation in interest rate is just a drop in the bucket. As long as you can cash flow the rental property and have plenty of cash in the bank, you can afford to wait for interest rates to come down. And once those rates come back down, prices will appreciate again.”
Once those rates come back down, you’ll have two choices:
- Sell the property to lock in the liquidity you created by being a diligent investor during uncertain times or
- Cash-out refinance the property at a lower interest rate and use that liquidity to buy another rental property.
You’ve guaranteed yourself victory regardless of which path you choose.
Don’t Put Too Much Into Rental Properties
McLean says, “My top performing investors are mindful about putting the right kind of improvements into rental properties. They are savvy and pragmatic, using materials that look nice while withstanding the wear and tear of tenants.”
Be careful not to over-improve your rental rehab. Rental property tenants aren’t looking for premium finishes or flooring—they’re looking for a convenient location, a roof that doesn’t leak, and a house they can make feel like home. If you can afford to wait a few years to replace the aging HVAC system, do so. And along the way, make it a habit to set aside an improvement allowance out of each month’s rent to store up for needed repairs down the road.
Don’t Be Afraid to Sell
As you go about building your single-family rental portfolio, don’t be afraid to turn your deep buys into near-term sales if the opportunity presents itself. Liquidity will propel you forward in a cash-intensive business and the door of opportunity will knock again. Even if you think you have found the perfect long-term hold, if the right offer comes at you, take it.
When Investing In Rentals, Watch Your Credit Score
If you’re smartly choosing to invest in long term rental loans with the intention to refinance later, keep tabs on your credit score. McLean cautions, “I know investors that solely use credit cards to make repairs. They miss a payment on accident and their credit falls from 720 to 660. Refinancing then becomes more difficult because Wall Street places a lot of weight on your credit score.”
Work With a Relationship-Oriented Lender
Every private lender dispenses funds. Relationship-oriented lenders act as consultants, guiding you on how to generate wealth in the real estate business—even when interest rates are high and supply is low. In such markets, it’s more important than ever to be choosey about your investments and the private lenders enabling your business.
Download the free Rental Rehabber’s Guide to Finance In a High Interest Rate Environment.