With the economy back on the rise year after year, many experts are wondering when the bubble will burst or when a bit of slowing will set in. In cases like this, interest rates have historically gone up without warning.
Most experts think that once the Federal Reserve ups the interest rate just a bit, the temptation will be to continue for several quarters at the very least. It’s probably a good bet that the recent string of years with very low-interest rates may very well come to an end in the near future, and higher rates are on the horizon. For real estate owners, this prediction has profound consequences, but surprisingly with some benefits as well.
Why Higher Interest Rates Can Be Beneficial
There’s no reason to fear higher interest rates, especially if you are a seller. In general, when the Fed raises rates, that means the economy is strong, and the real estate market is in good shape.
It also usually means that banks are enticed into lending more money because they are able to get a higher profit on the loans. Another factor related to higher interest rates is the general growth of the real estate market. Historically some of the strongest price growth in the retail and commercial real estate market has come in high-interest rate environments.
Why Higher Rates Can Be a Hindrance
Higher rates can keep a lot of people out of the housing market altogether, or at least cause them to have larger payments and more difficulty qualifying for mortgages.
With a smaller buying pool, you as a seller are in a less advantageous position. It’s as if every one of your potential customers just got a pay cut. They, for practical purposes, have less to spend on housing and any other consumer goods. As an owner, higher rates put you in the position of having to lower your asking price in order to attract interested buyers.
Taken from the buyer’s perspective, higher rates can mean that it can be tougher to qualify for a loan, and harder to amass the money needed for a down payment. It can also be more challenging to get into income-producing real estate deals. When rates go up, many income properties become “break-even” deals for a potential buyer. In the end, that means fewer deals get made.
The Choice: Hold or Sell?
For sellers, know if the current financial environment is a good time to sell can be a tough dilemma. Should you hang onto your real estate properties or unload them at what just might be their top value?
Most experts say that you may want to sell properties that you purchased for short-term purposes but hold onto the ones that are considered longer-term investments. This, of course, depends on your own situation and whether you need immediate cash.
It’s always a smart plan, in any kind of market, to know what you’ll be doing with sale proceeds if you do sell. Will the money go into a stock market fund, a savings account, a CD, a larger piece of property that you’ve had your eye on, or will you lend the money to other real estate investors? When you do decide to sell, have a written plan for where the cash is going. That way you’ll be more apt to make a wise decision.
Is Now a Smart Time to Purchase Real Estate?
Even in today’s fast-moving economy, it is still an advantageous time to acquire real estate as an investment. Whether you are attracted to a straight purchase, a flip, fixer-uppers, or just in search of undervalued real estate deals, now is a smart time to buy if you can afford to.
Investors should never try to predict whether interest rates have “topped out.” Many fortunes have been lost doing so. The wise thing to do in a situation like the current one is to cautiously determine whether to sell some short-term holdings or not. It is usually a smart move, however, to hang on to real estate investments that you categorize as “long-term,” no matter what the current level of interest rates.
Every real estate owner should also watch the stock market very closely. When the stock market dips significantly, many investors cash out and look for “hard” assets like real estate and precious metals. The assumption is that stocks are risky when they are at historic highs, and hard assets are a safer place to park large sums of money. That factor alone can be a boon to sellers.
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