Interest rates have been a hot topic for investors lately, with everyone waiting to hear what the Fed will do next. Will they raise interest rates? Will they keep them steady? Or will they lower them even further? It’s a waiting game, and it can be nerve-wracking for those of us in the investment world.
At Viking Capital, we’re constantly monitoring the actions of the Fed, as they impact everything we do. From managing our real estate deals to keeping our budgets in check, the Fed has a direct impact on our daily operations.
So, what exactly does a Fed rate hike mean for investors?
When the Fed raises interest rates, it means that borrowing money becomes more expensive. This affects everything from credit cards to mortgages. The idea behind a rate hike is to slow down the economy and keep inflation in check.
For investors, a rate hike can mean a shift in investment strategies. Higher interest rates can make fixed-income investments more attractive, as they offer a higher rate of return. Stocks, on the other hand, may become less attractive, as the cost of borrowing money to invest becomes more expensive.
But, as with everything in the investment world, there are always risks involved. Higher interest rates can also mean a slowdown in economic growth, which can impact corporate earnings and stock prices.
So, what should investors do in the face of a potential rate hike? The key is to stay diversified and not make knee-jerk reactions based on short-term fluctuations. A well-diversified portfolio can help weather the storm of rising interest rates and maintain long-term growth.
It’s also important to remember that the Fed’s actions are not the only factor impacting the economy and investment markets. Factors like international events, political decisions, and technological advancements all play a role in shaping the investment landscape.
So, while we wait to hear what the Fed will do next, it’s important to keep a long-term perspective and stay informed about the factors impacting the markets. With a solid investment strategy and a willingness to adapt to changing circumstances, investors can weather any storm that comes their way.
What Does A Fed Interest Rate Hike Mean For Multifamily Investors?
Let’s begin with the recent announcement from the Fed. They have increased the interest rate, also known as the federal funds rate, by 0.25%, bringing the target range up to 4.5% – 4.75%. This is the highest it’s been since October 2007.
The purpose of the Fed’s actions is to combat inflation. Raising interest rates makes credit more expensive throughout the economy, affecting both businesses and consumers. This means that loans, including mortgages, become more costly, leading to higher interest payments for everyone.
Those who cannot afford or do not want to pay higher interest payments, they may choose to postpone or abandon projects that require financing. On the other hand, this encourages people to save more money to earn higher interest payments. The rise in interest rates may also lead to a slowdown in the housing market as fewer people can afford to buy homes with the increasing mortgage rates.
As a result, the supply of money in circulation decreases, leading to lower inflation and a reduction in economic activity, which helps to stabilize the market.
In summary, the Fed raises interest rates to curb inflation and reduce the increasing cost of living. However, this also means that obtaining financing or debt will become more expensive, leading to increased expenses and potential impacts on the real estate market for investors.
Higher Interest Rates Means Multifamily Syndicators Need to Streamline and Operate Most Efficiently
At Viking Capital we are constantly analyzing potential deals. When interest rate hikes occur, we have to scrutinize each deal more closely as we have limited ability to change the rates being offered to us. We underwrite each deal based on the rates we can find, ensuring that any additional fees are included.
In a high-interest rate environment, it takes only the best operators to make real estate deals truly work. Unfortunately, some operators may move other numbers around to make the deal seem feasible, such as cutting costs in management line items or budgeting less for value-add opportunities. These can become extra risks and lead to smaller returns for investors.
With the federal funds rate on the rise, it’s more crucial than ever to find a good operator. During the appreciation cycle after the 2020 pandemic, investment groups could get away with buying something that was a little too expensive due to incredible market velocity. However, today, you can’t get away with that.
No one should hope for appreciation in today’s market. Operators must show that the deal works and offers returns for their partners without the potential of appreciation. Such assumptions simply don’t work.
What Can A Multifamily Operator Do In This Housing Market?
As an investor in the real estate market, you know that interest rates can have a significant impact on your bottom line. In a high-interest rate environment, finding and closing deals becomes more challenging. However, there are ways to navigate the uncertainty and continue to succeed in this market. Here are a few strategies to consider:
- Prioritize conservative underwriting and preserve investor capital.
In any market, the most crucial thing for any operator should be preserving their investor’s capital. Rushing into a deal just to offer something is never a good idea. Instead, deals must be scrutinized more carefully in a higher interest rate environment. Take the time to carefully underwrite and analyze deals to ensure they are sound investments that offer solid returns.
- Look for fixed interest rates.
In a high-interest-rate environment, finding fixed-rate debt can be a smart move. With fixed-rate debt, the interest rate remains the same for a specified duration of time, offering protection against ups and downs in the market. While banks or lenders may charge a slightly higher interest rate for fixed-rate debt, it can be worth it for the added security.
- Consider loan assumptions.
An assumable loan is one that can be taken over by the buyer when the owner of a property sells. If you can find an assumable loan with a lower interest rate than the current market rate, it could make a deal work that otherwise wouldn’t be feasible with a new, higher interest rate loan. Keep in mind that not every loan can be assumed, and there may be additional fees or longer closing times associated with this strategy.
Overall, the key to success in a high-interest-rate real estate market is to be patient, prioritize conservative underwriting, and look for ways to minimize risk. By following these strategies, you can continue to make smart investments that offer solid returns, even in a challenging market.
Are Floating Interest Rates Feasible?
Although securing a fixed rate, such as an assumable loan, is the primary means of hedging debt, floating rate debt can still be utilized in today’s high interest rate environment. However, there are several ways in which these loans may work for a deal.
One option is to secure a period of interest-only payments, typically the first two years, which can make the deal more appealing if the property will be sold during this period. However, it is crucial to consider the impact of higher interest payments after this initial period and to account for these expenses in the business plan.
Another approach to make floating rate debt structures work is through the purchase of caps. Caps are designed to limit the interest rate on a loan, functioning like a set budget for a shopping trip. Caps must be purchased when a loan is originated and come with upfront fees that may impact cash flow.
While these options can mitigate risk, additional fees can also significantly impact a deal. Operators must ensure that any hedging strategy in a high interest rate market includes the impact of these fees to avoid potential impacts on distributions and returns.
What Investors Need To Know About Rising Interest Rates And Passive Real Estate Investing
Real estate investors can still find promising investment opportunities in a high-interest-rate environment. However, certain factors need to be considered before making investment decisions.
One of the impacts of rising interest rates is a slowdown in deal flow. The increase in the federal funds rate by the Federal Reserve to curb inflation can limit the money supply and make borrowing more difficult. This may cause a delay in the sale of real estate assets, as sellers may not adjust their prices to account for higher interest rates, while buyers face increased costs associated with debt. This creates a gap in the purchasing of real estate assets.
It may take some time for multifamily property owners to adjust to the impact of higher interest rates on buyers’ ability to pay the same prices as before. This lag in expectations may lead to a reduction in deal flow, where sellers are unwilling to lower their asking prices, and buyers are unable to make deals work due to increased interest rates.
Furthermore, the entire housing market is affected by higher interest rates, including rising mortgage rates, making it challenging for those searching for a new home or a small rental property to invest in. Housing prices may initially remain high but could soften as sellers realize buyers face higher mortgage rates.
Why Is This The BEST time to Invest?
As interest rates rise and the real estate market undergoes changes, it becomes crucial to invest in a team that is careful and conservative in underwriting deals, and is capable of stress-testing the investment from all angles. The team should also incorporate ample reserves and make strategic decisions on behalf of the investor.
Investors who are willing to put in the time and effort to identify and evaluate the best opportunities in this high-interest-rate environment may find it to be the perfect time to invest, particularly when others are hesitant. Historically, such times have led to great fortunes, and this could be a chance to alter the course of your financial future.
In fact, investing in multifamily real estate syndication during a recession and times of high interest rates can be a smart move for several reasons.
Firstly, during a recession, the demand for rental properties tends to increase as people may not be able to afford to buy their own homes. This can lead to a steady stream of income for real estate investors.
Secondly, when interest rates are high, property values may decrease, creating buying opportunities for savvy investors. Lower property values mean that investors can purchase properties at a lower cost, potentially increasing their returns in the long run.
Thirdly, in a high-interest rate environment, many investors may be hesitant to take on new projects or make large investments. This can create less competition for investment opportunities, giving those who are willing to invest the potential to find great deals.
Lastly, investing in multifamily real estate syndication allows investors to pool their resources and invest in larger properties with more units, spreading out the risk and potentially increasing returns.