4 Ways Residential Real Estate Investors Can Benefit During High Interest Rates

The low-interest rates residential real estate investors have taken advantage of over the past ten years suddenly came to a screeching halt in 2022. Now the annual inflation rate is climbing. In the U.S., inflation sat at 9.1% for the 12 months ending in June 2022. According to data published July 13 by the U.S. Labor Department, that’s the highest increase since November 1981.

In response, the Federal Reserve is increasing interest rates to try and keep inflation at bay. When interest rates rise, they affect asset classes in different ways; some worse than others. Thankfully, residential real estate historically performs well during bouts of climbing rates. It has the ability to grow net income during those periods better than other assets.

Let’s take a look at how investors can possibly benefit during high interest rates.

1. Popular Regions Still Bringing Higher Sale Prices

Higher interest rates tend to dissuade potential owners from buying new houses, especially during a period of inflation when they have less money to spend. That creates less demand for properties in general, which can lead to a drop of pricing on homes still on the market.

Regardless, there are still people who want or need to move to other cities for various reasons. Since a majority of existing owners aren’t selling because they want to avoid a higher mortgage on their next house, available property may be limited. This is especially true in highly sought after areas like the Sun Belt.

That means investors who own property in those regions are still seeing a high demand, so they can set their own pricing. According to the National Association of Realtors, Miami had the largest median price growth, up 40.1% from July 2021. Orlando and Nashville followed it with a 30.6% jump.

2. The Demand for Single-Family Rentals Increasing

With higher interest rates and/or home prices escalating in high demand areas, not everyone will able to afford to buy. So people are now looking at living in single-family rental (SFR) properties instead. This increasing demand is leading to bidding wars amongst renters in certain hot markets. If the Fed continues to increase interest rates as expected, the demand and pricing for SFR properties could continue to climb. Demand has increased so much, that even institutional investors are taking advantage of it.

We predict property investors who weren’t in the rental market before may now look at it as a possible new avenue of income. They could take properties they were hoping to sell and turn them into rental homes. While managing an SFR is a more long-term commitment than flipping and selling properties, being a landlord may provide substantial continuing monthly income.

3. A Sale-Leaseback Offers Another Option for SFR Investors

A sale-leaseback, also known as a leaseback, is where an occupant sells property but is allowed to remain in it for an extended period. This transaction is more generally used by businesses for tax and other purposes, but investors seeking single-family properties for rentals may also benefit from it. For one thing, this type of arrangement helps the investor compete against other offers when bidding on the house. It also means the property already has an immediate tenant, so the investor starts earning rental revenue right away.

Sellers also benefit in several ways. If they’re trying to buy another home, it supplies the funds they need to make a down payment. It also provides the time to search for a new house without feeling rushed or having to deal with the transition period between buying a new one and selling theirs.

If the seller will only be a tenant for a short period, the buyer can offer them a lower rental rate in return for a reduced purchase price on the property. This saves both parties money, which helps offset rising mortgage interest rates. When the seller leaves, the new owner can set the rental price at market values.

4. Seasoned Investors Have An Advantage Over Newer Ones

As with any financial venture, experienced residential real estate investors will be able to take advantage of opportunities more often than inexperienced investors. Years of success that help seasoned investors recognize potential good deals, especially during times of economic uncertainty.

As interest rates rise, part-time or inexperienced investors may find it more difficult to raise money to cover their purchases. Veteran professionals have increased buying power through access to trusted relationships with financiers they’ve built over time. They also have in-depth knowledge and comprehensive business plans in place.

While high inflation and rising interest rates may hamper the market temporarily, savvy professionals know how to keep their investments working. If not immediately, then for the long-term.

Don’t Let High Interest Rates Slow You Down

Remember that residential real estate is a long-term investment. Some experts expect interest rates to drop at some point in the future, though when that happens is anyone’s guess. Hopefully, sooner than later.

Until then, don’t let high interest rates slow you down. There are opportunities out there. Be patient, seek them out, do your homework, and use your expertise to continue strengthening your portfolio.