Those buying, investing in, and selling real estate have been spoiled by very reasonable interest rates for the past few years. With the Federal Reserve indicating more future rate hikes to come, many of those planning to engage in real estate transactions have been brought to a panic. However, it does not need to be that way. This article explores several ways real estate consumers can capitalize on high interest rates in any market.
While it is easy to see how low interest rates can stimulate spending, incentivize borrowing, and increase home values, there are multiple ways that those looking to buy or sell a home can take advantage of interest rate increases that are now all but inevitable. These tactics will allow you to advertise, negotiate for, and purchase real estate at a level that is efficient and effective to keep you ahead of the market.
Enjoy New Construction Homes at a Discount
When interest rates rise, raw materials used to build new houses, like steel and concrete, see a decline in value because producers are incentivized to increased supply. On top of that, home builders operating on thinner margins will be competing with one another for a smaller pool of buyers, giving them even more reason to price new construction homes aggressively.
Local builders will be especially vulnerable as they work to make payroll and other overhead expenses during a time period where their revenues can be cut by up to 50%. Contact a few new home builders to get an idea of what their base cost is and then you can factor in the upgrades you want – and everything is an upgrade for new construction homes. Price out everything from the façade on the home to the door knob handles to ensure you have an accurate budget when you sign a contract to purchase the house.
In short, individuals, families, and investors will be able to purchase a new home that would provide decent equity when the market begins to level out. Moreover, when the time comes to sell the home, most probably four to seven years down the road, you will not have to invest in many capital expenditures because most of the “bones” of the home – the air conditioning, roof, electrical, plumbing, etc. – will all still be fairly new.
Target Baby Boomers When Selling a Home
In a time where millennials and first-time home buyers will see their purchasing power decline with the rising rates, baby boomers and other older demographics that have built up nest eggs will see their savings grow much faster. These groups’ confidence typically begins to rise as their interest begins to compound and home values level out, making them more apt to invest in real estate or consider purchasing real estate as a tax shelter or to use it personally.
Additionally, any retirement plans or 401k accounts that their employer set up for them will be on high gear at the perfect time, as many of these potential homebuyers will be approaching the age to extract their investments and gains. These investment vehicles are heavily avoided by younger home buyers that either do not have extra income to put towards investment and savings, have grown a distrust of the market, or do not have employers that invest in their retirement on their behalf.
One of the best way to utilize this strategy is to use one avenue that many in the real estate industry have abandoned: print advertising. Take out a half-page ad in a local newspaper and a small listings in some of the local real estate magazines. Another great option will be to post print outs of the listing at clubhouses of 55+ communities. Most of them have areas to advertise real estate for sale and rent, and many have friends and family that are looking to purchase in the area.
At first, many would-be home buyers will get off the fence to ensure they purchase a home before the current interest rates rise any further. After that threshold, targeting the older demographic when you are selling a home in a high-interest environment is critical because this is where disposal income and economic confidence will likely be at its highest.
Narrow Your Real Estate Search and Buy with Less Competition
Getting hyper-focused on what type of real estate you need is crucial, because you will have much more inventory on the market to choose from and it can be easy to get confused and pettifog your real estate search.
Talk with your family about the things you cannot compromise on when buying a home: location, price range, and certain criteria like square footage, construction, or the size of the garage. From there, get even more into the nitty-gritty and discuss if you want to avoid wood-frame houses or if you absolutely need a home with at least a half-acre of land.
Realizing your non-negotiables will make it easy for you to show the right homes for sale, convince the seller you are serious, and negotiate for the best deal possible.
Remember that sellers are dealing with buyers that are searching for homes that are in great supply in a high-interest atmosphere. They will be discouraged by the “window shoppers” and “tire kickers”, so when they see you are prepared, motivated, and pre-qualified to buy the home, that will be a critical point of negotiation.
Set Yourself Up to Refinance or Expand in the Future
One of the most important factors to remember about having a high interest rate is that if you play your cards right, you might be able to refinance into a lower interest rate down the road. This way, you are capitalizing on decreased purchase prices so that when the market turns again, you have equity built up and can refinance to further decrease your monthly payment. This has been a major strategy of homeowners with high interest rates in the past few years while interest rates were close to zero, with the number of home owner refinances peaking in the third quarter of 2016.
Another plan from that point would be to simply sell your home, extract that equity, and reinvest it into another property. If you are investing, this is a perfect time for a 1031 exchange.
This very well may be the optimal time to move up in home with a much lower interest rate and large down payment that allows you to avoid paying private mortgage insurance that is nearly ubiquitous in the low interest rate markets.
Negotiate Firmly with More Distressed Home Sellers
Even in a market where there are less buyers for each house for sale, there will be home sellers that absolutely have to sell their homes. On top of that, the number of short sales, foreclosures, and distressed properties may also rise just for the shear fact that there will be too much competition to net the amount they have invested in the property.
Another addition will be probate and estate sales, which can often be sold by family members that do not even live in the same state or country. Identifying these sellers and negotiating a win-win deal with them can be your most advantageous outcome because they will find themselves among the most demoralized when they realize it has grown much more difficult to sell real estate in that market.
Some of the best places to find demoralized sellers is right in the Multiple Listing Service (MLS). Ask your real estate agent what the average time on the market is in your price range, and contact homes that fit within your criteria that are on the market at least 50% longer than the market average.
You will also want to find those selling their home For Sale By Owner, on sites like Zillow, FSBO, and Trulia. Most of these homeowners will eventually hire a Realtor to sell their home, so keep that fact in mind as you search. To ensure your best interests are kept at the forefront, hire an agent and let them negotiate with the FSBO owner.
A smart move is to simply drive through neighborhoods that you are interested in. Take a notepad with you, and write down the addresses of MLS homes that look to be neglected with high grass or in need of some tender loving care. Get the results to your agent so they can help you determine the best price to offer, but to also ensure your negotiation power is improved based on what you have personally seen during your drive-by.
Take Advantage of Lending Programs
Mortgage brokers and lenders usually have a surplus of available funds when interest rates rise because the demand for housing in the market is decreased. Essentially, banks have an obvious incentive to lend money in a high-interest setting, and on a local level banks and other lenders will compete with one another to earn the business of home buyers. They typically offer concessions to help with down payments and closing costs, as well as different loan packages for public servants or those with superior credit ratings.
When you find yourself in a position to purchase real estate and the lenders are contending for your business, there is some clear leverage there. Connect with at least three local credit unions, mortgage brokers, or banks, and get detailed quotes on what your interest rate, monthly payment, and estimated closing costs would be. Then compare them and also take into account how confident you feel about each loan officer, as some will be more capable than others.
One minor point, make sure you ask them not to pull your credit, because each inquiry into your credit will cause it to drop, and you do not want to deal with that while you’re shopping for the right person and program.
When the real estate atmosphere shifts, many real estate professionals that are part-time or not suited for this industry usually quit and get another job to pay the bills. Therefore, trying markets truly do bring out the most reliable and tested real estate agents and loan officers as long as you take the time to network and meet them.
Lower Inflation Makes Owning Real Estate Cheaper
Rising rates are typically a central bank’s remedy when it seems that inflation is getting out of control. Because the rate hikes raise the cost of getting a mortgage and moderate economic activity, inflationary pressures are reduced. If you own a house with a fixed rate, this is the perfect time to invest in projects and improvements that you have meant to take care of. As we mentioned, commodity prices will also be lower so contractors bidding for jobs can also do so more effectively.
From an economic perspective, investors around the globe will prefer to put their money in the US Dollar when it produces a higher rate of return. This results in an appreciation of the exchange rate and higher purchasing power for those with savings and cash on hand. Since real estate prices will be falling and the economy will be seeing reduced consumption as a whole, those who buy homes or other real estate investments will be in a prime position to take advantage of a slow market and low prices.
Closing Thoughts
When markets adapt and change, many people will get caught up in the turmoil and uncertainty, and the decisions they make from that point on will be driven by emotion rather than analysis and reason. When you are making real estate decisions, it is especially important to focus on the facts, have a plan for the future, and trust that you are taking the right steps towards creating wealth and safeguarding it.
As interest rates rise, and they almost certainly will at some point, you will be one step ahead of anyone else who is buying or selling homes by not getting dragged down by the headlines and market data.
Some of the largest deposits of wealth are made when the vast majority of people are apprehensive, cautious, and looking the other way. In the meantime, those that are prepared and confident make financial moves that stay with them and their families for decades.
If you found this article on ways real estate consumers can capitalize on high interest rates helpful, please share the article so other real estate consumers can also benefit from the information.
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7 Ways Real Estate Consumers Can Capitalize on High Interest Rates
Therefore, investing in rental properties during rising interest rates can be profitable. Purchase rental properties at a lower price due to reduced demand for buying homes and rent them out to tenants at a higher rate. This can result in higher rental income and potentially higher property value over time.
Therefore, investing in rental properties during rising interest rates can be profitable. Purchase rental properties at a lower price due to reduced demand for buying homes and rent them out to tenants at a higher rate. This can result in higher rental income and potentially higher property value over time.
Rising interest rates increase the cost of capital, so fluctuations in the interest rate environment can contribute to rising cap rates. That's the case in the current economic environment. The Fed's interest rate hikes increased financing costs, limiting transaction volume and making it difficult to assess cap rates.
The two most popular places to deposit cash are money market accounts and certificates of deposit (CDs). Money market accounts offer higher rates than a typical savings account and provide easy access to your funds.
One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase as interest rates move higher because they can charge more for lending money. Otherwise, some stocks will do better than others as interest rates increase.
The more money you put down toward a home, the less you'll need to borrow from a lender and the lower the rate they may give you. It can also help you avoid paying for private mortgage insurance (PMI), which can add extra costs to your monthly mortgage payment.
Rising mortgage interest rates often mean a smaller pool of buyers who can afford the price you want. Selling a home isn't free, so if you can't maximize your price, you might want to wait. If you recently refinanced your mortgage, it may not make financial sense to sell just yet.
You can help offset larger monthly payments caused by higher rates by saving more for your down payment. The more you put down, the lower your mortgage balance and interest payments. Some lenders also offer better interest rates for higher down payments.
Even if the value of your property takes a minor hit due to higher interest rates, the long-term potential for growth usually outweighs these short-term fluctuations. Think of your rental property as a marathon, not a sprint.
The most obvious way to make money in real estate is to buy an investment property (or several). You could buy a home and rent it out to long-term tenants or purchase a multi-unit rental property or small apartment building.
Key Takeaways. The capitalization rate is calculated by dividing a property's net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor's potential return on a real estate investment.
This means that the property generates a return of 7.5% on the investment, based solely on its income-producing potential. Note that cap rate does not take into account any financing costs or potential changes in property value over time.
The interest to be capitalized is determined by applying a capitalization rate to the weighted-average carrying amount of expenditures for the asset during the period. The amount of interest cost capitalized should not exceed the amount of interest cost incurred by the reporting entity in that period.
Investing in rising interest rates can be done by investing in banks and brokerage firms, tech and healthcare stocks, and companies with large cash balances. You can capitalize on higher rates by purchasing real estate and selling off unneeded assets.
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