Interest Rates and Real Estate Investing
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- Amanda Farrell
- August 8, 2022
- 8:52 am
- No Comments
It happened again. The Federal Reserve made an “unusually” significant hike of 0.75% on July 27 after raising them by .5% in May. During a news conference on the decision, Fed Chair Jerome H. Powell indicated that another considerable rate could be coming in September.
The decision was driven by the goal of pushing inflation down to 2% as part of the Fed’s goal to create “maximum employment and stable prices for the American people.” During the press conference, Powell also mentioned the housing sector’s roller coaster ride of current mortgage rates.
So, how do federal interest rates affect real estate investors that use financing?
Like many things in real estate, the impact of the Fed’s announcement on mortgage lending is complex. After the Fed’s announcement, many braced for another mortgage rate increase after huge jumps in June and July. Still, new data suggests that the average 30-year mortgage rate went down.
Two likely reasons are:
- Longer-term mortgage rates are influenced by the 10-year Treasury note yield, not the Federal Reserve.
- Experts suggest that mortgage lenders had already “baked in” an anticipated 1% hike.
While longer-term purchase loans aren’t directly related to the Fed’s decision, adjustable-rate mortgages (ARMs) and equity loan products like home equity lines of credit (HELOCs) and home equity loans will likely see higher borrowing costs. ARMs and HELOCs are particularly vulnerable to the swings of fiscal policy since the monthly payments reflect changing rates. Meanwhile, borrowers with a 15 or 30-year fixed-rate mortgage remain locked at their current interest rates.
Hard money lenders are not directly affected by the Federal Reserve’s actions because they are private entities that develop their own rates and requirements for lending. These lenders examine the details of the project as well as the creditworthiness of the borrower to determine how to structure a loan.
Related Reading: Five Ways to Finance Real Estate Investments
For investors who are sensitive to the rate fluctuations, there are a few tactics you can try to minimize the toll it takes on your budget.
Lock in Your Rate
First, obtain a solid pre-approval from a lender. Understand the terms of the loan, calculate your monthly payments, and determine if there’s positive cash flow. It’s easy to get fooled by “teaser” rates advertised online. These are shown under the assumption that the borrower will have near-perfect creditworthiness. It’s rare for the numbers you see on the site to match the final offer.
Also, be aware of the difference between pre-qualification and pre-approval.
Pre-qualification:
- Requires no financial and personal information
- Soft credit inquiry that doesn’t impact your credit score
- Quoted rate is likely to change
Pre-approval:
- More rigorous underwriting requiring financial and personal documentation
- Hard credit inquiry that can impact your credit score
- Rate is locked for a set period of time and can often be extended for a fee
If you do all the legwork of finding a property and making an offer based on a pre-qualification, you’ll likely find that the numbers on the loan estimate are off. At this point, it may be too late to back out of the deal or to find a new lender with better rates.
Find and Perfect Your Real Estate Investment Strategy
Before buying your first real estate investment property, ask yourself these seven questions. When you have a clear understanding of your goal, it’s easier to find the strategy that makes the most sense to achieve it. Depending on your financial resources, network, and market, your ideal strategy may be:
- Wholesaling
- Fix-and-flip
- Rental rehab
- Turnkey rentals
- Single-family
- Multi-family
- Long-term rentals
- Short-term rentals
It’s easy to become distracted by all these choices, but it may yield the best outcome to focus on one to perfect. Each requires time and resources to find a repeatable routine that leads to success. Introducing a new strategy before you’ve fully developed the rhythm of the first can disrupt positive outcomes for both. It’s also important to remember that what works for one market might not work in another. Before adopting a model another investor uses, remember to analyze how market factors like migration, rental demand, and employment may affect its success.
Target Longer Days on Market, Expired Listings, FSBO
When interest rates rise, the housing market tends to cool. The massive list prices become less affordable to average homebuyers. In June, home sales fell to the slowest pace since the pandemic in 2020. However, the median price of existing homes sold reached another record of $416,000, compounding affordability problems. Although mortgage rates have been much higher in the past, the jarring rate at which they shot up priced out more people.
Mortgage application trends also point to a weakening buyer demand.
This softening is creating an opportunity for buyers and investors to take advantage of price reductions. Supply is growing too with 1,260,000 units for sale at the end of June, which is an increase of 9.6% compared to May.
This likely means that more sellers will be willing to make a deal. By targeting properties with longer days on the market, expired listings, and For Sale By Owner (FSBO), you may have the opportunity to balance out the higher rates.
Nationally, the average time on the market in June was 32 days. When properties sit longer than that, it could be for several reasons. The price may be too high. It may require too many updates for buyers looking for a move-in-ready home. The marketing strategies may need to be tweaked. The location may not be suitable for the types of buyers the seller is trying to attract. Or it could be far too distressed to fetch a retail price. Whatever the reason, creating a list of properties with an extended time on the market and looking more closely at them could result in a great deal.
Frustrated, these sellers may decide to pull the house off the market. To find expired listings, work with a real estate agent who has access to the MLS or use a prospecting platform. Create a list of properties that fit your buy box and reach out to the owner to ask if they’re still interested in selling. During your call, try to uncover why the property was taken off the market and why the owner thinks it didn’t sell.
Another group of sellers to target is those who decide not to list with an agent. FSBO transactions accounted for 7% of home sales in 2020. The final average price was significantly lower than agent-listed properties at $260,000 compared to $318,000. Methods to find FSBO include driving to look for yard signs, the MLS, sites like Zillow, social media groups on Facebook, and newspaper classified ads. It also helps to ask friends and family if they know of anyone looking to sell. Roughly 23% of FSBO sellers used friends, family, and neighbors as a method for marketing.
Work with an Investor-focused Title Partner
When a rate is locked in and ticking toward expiration, the last thing you want is a delay. While the purchase contracts in a traditional loan with a homebuyer are straightforward, the tools used by investors like novations and assignments aren’t as common. Not all title agencies understand or accommodate these types of transactions. Avoid the risk of a transaction stopping in its tracks by seeking out a title-focused title partner early on.
At Blueprint, we’ve built our title platform and process around the specialized needs of investors, lenders, and proptech companies. We focus on novations, assignments, double closes, and portfolio deals that these real estate professionals commonly request. With the Blueprint platform, it’s easy to submit, track, and manage every closing, whether you’re doing one or one hundred.
We’re committed to removing friction in the closing experience that wastes time and money and offering lower-cost premiums whenever possible. As part of that mission, the Blueprint family welcomed our affiliated underwriter, Southwest Land Title Insurance Company, in 2021. With Southwest, we can offer up to 40% off on title premiums in Tennessee, Nevada, North Carolina, and Arizona.
To learn more about how we can help you get to your closing quickly and affordably, schedule a demo.