In a sign that the economy is steadily improving, the Federal Reserve recently announced an increase in interest rates, while also expecting to raise rates another three times in 2017. As a result, investors are wondering how an environment of rising interest rates will affect their real estate investing profits.
Rising Interest Rates
After the turbulent election process, many people were left wondering why the Fed recently raised interest rates.
The Fed’s decision was based on the belief fact that the economy is steadily expanding at a sustainable rate. In fact, the unemployment rate is down to 4.6 percent, which is the first time it has fallen under 5 percent since 2008.
“My colleagues and I are recognizing the considerable progress the economy has made,” Janet L. Yellen, the Fed’s chairwoman, said at a news conference. “We expect the economy will continue to perform well.”
The Fed’s goal, in part, is to act as a counterweight to President Trump’s plan to increase economic growth to four percent from its current rate of 2 percent. The Fed feels the country is currently experiencing the maximum sustainable growth rate and wants to make sure the economy doesn’t grow too quickly.
This latest rate increase moved the Fed’s benchmark interest rate from 0.5 percent to 0.75 percent, which is still at historic lows.
How Interest Rates Affect Property Values
Interest rates have a profound effect on the value of income-producing real estate. Besides higher interest rates on mortgages, interest rates affect the availability of capital and the demand for investment properties. In turn, these factors affect rents and property values.
Rising interest rate, therefore, typically increase the cost of purchasing real estate investment properties, which increases property values.
Investors purchasing investment property in an environment of rising interest rates should, therefore, anticipate raising monthly rents to offset increased costs.
What Should Investors Do?
The Federal Reserve expects the economy to improve with Trump’s administration, and they are anticipating raising interest rates three times in 2017. Therefore, investors must assume interest rates are going up.
Real estate investors, therefore, must assume that financing costs and property values will also increase in the near term.
Investors should anticipate raising rents, perhaps more aggressively than last year. And, if they are thinking about selling investment properties, they should look for values to increase, providing a good opportunity to sell.
When buying properties, investors should selectively purchase properties that can support higher rents and that will appreciate in an environment of rising interest rates. These are the investment properties that will generate profits and cash flow, while also helping investors manage volatility and protect their portfolios against inflation.
Graystone Investment Group
Graystone Investment Group is an experienced real estate wholesaler in metro Tampa Bay. We help real estate investors generate profits with properties that are useful in managing volatility and protecting investors against inflation.
Unlike other investment groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.