Successful real estate investments rely on maintaining a fine balance between a multiplicity of factors. From the expenditure of property maintenance procedures to understanding that your property loans must have competitive rates, there are a number of factors to consider before and during your tenure as a Houston, Texas real estate investor. Understanding the nuances of rising interest rates will help you to better prepare or change your real estate investment strategies.
3 Key Factors to Consider in the Face of Rising Interest Rates
1) How can rising interest rates affect your investment property loans?
The answer to this question will depend on your chosen funding source. For example, a rate that is offered by a traditional financial institution will be tied to a 10 year treasury rate, which means that it will be reactive to rising (or falling) interest rates. If, however, you have used a hard money lender as your financing source, then you will not have to worry about rising interest rates affecting your property loans.
2) How could rising rates affect property values?
There is some speculation that rising interest rates will cause a reduction in property values. According to Fannie Mae Vice President for Applied Economic and Housing Research, Mark Palim, "Rates tend to rise because, in a relative sense, the economy is doing well, incomes are going up, people can afford more and they're willing to take out a larger mortgage." Rising property rates don't directly correlate to reduced housing property values. On the contrary, rising interest rates could indicate changes to the market: changes, which the savvy investor can capitalize on.
3) How might rising interest rates affect potential buyers?
Understanding how rising interest rates will affect potential buyers can be a bit tricky due to its reliance on several other factors. You need to consider the following factors in order to best understand if your potential buyers will be affected by rising interest rates.
- Analyze the location of the property and the surrounding economic factors of the area. If rising interest rates occur and the local economic market continues to remain strong, then there is solid chance that your buyers will not be greatly affected by the rising rates. This line of thinking relies on the fact that a stronger economy is good for buyers, due to the fact that they have extra money to spend and a positive forward-thinking financial outlook.
- Review the statistics for buying and selling homes in the local area. If qualified buyers have been delaying their entry into the market, then rising interest rates might just be the push they need to buy a property. When interest rates rise, qualified buyers will want to jump at the opportunity to lock in a lower rate so that they can purchase their chosen property.
- Examine previous long term real estate trends. Buyers who are not eliminated from the market will typically be more credit-worthy than the "borderline qualified buyers." While there might be fewer candidates for your home, the candidates that do remain are more likely to a) qualify for the loan and b) purchase your home. By analyzing long term real estate trends, you can better understand how previous periods of high interest rates have affected your local real estate market. With this analysis in hand, adjust your real estate investment strategy accordingly.
By vigilantly remaining aware of the current (and projected) market conditions real estate investors can be better prepared in the face of rising interest rates. Carefully weigh the risk vs. reward of selling an investment property during a period of rising interest rates, and be sure to properly analyze previous markets for insights into future market reactions. To learn more about investing in the Texas real estate market, contact the experts at Catalyst Funding at 832.648.3626. If you’re ready to see if you’re pre-approved , you can also fill out our loan application form.