Throughout most of the pandemic, interest rates have been extremely low. As a result, incredibly high numbers of people have rushed to obtain mortgage loans in order to buy properties with less expensive debt. The result has been a strong seller’s market that has lasted for well over a year now.
However, with the pandemic slowing down, many people believe that interest rates will soon begin to rise. Increasing interest rates are often perceived as a bad thing for the real estate investing market. However, the truth is that there are a number of key "pros" for increasing interest rates. In this blog, I will break down the most important pros and cons that you need to be aware of regarding rising interest rates.
Cons of Rising Interest Rates
When debt is more expensive due to higher interest rates, the returns on real estate investments can be lower, as more of the income that comes in every month has to be put towards paying interest instead of going straight into the investor’s pocket. The difference may not seem that significant in the short term, but these numbers can add up over time. Paying higher levels of interest and taking lower levels of profit is something that can turn some investors away from real estate investing in a higher-rate environment. The higher the interest rates are, the more problematic they are viewed as for a percentage of real estate investors.
A Flight to Bonds
When interest rates increase, a significant amount of real estate investors move back to bonds. This happens because bond investors believe that they will be able to achieve higher returns with bond yields than with real estate investments. In other words, higher interest rates are viewed by many investors as a direct hindrance to a healthy ROI. This scares many of them into other assets like bonds. However, even though many types of bonds are considered to be safer investments by many people, their rate of returns can be low over time too. So, moving to bonds during periods of higher interest rates does not guarantee higher returns by any stretch of the imagination, and could be a mistake.
Pro of Rising Interest Rates
Yes, it is counter-intuitive; after all, why would increasing interest rates be a positive force in the real estate investing arena? The answer is, like in many cases, in the macro forces that impact real estate.
Stronger Demand for Multifamily Housing
As the rising interest rates are putting pressure on multifamily returns, and more investors are turning to bonds, demand for single-family housing tends to increase among institutional investors. Currentl