The past several years we have seen historic lows for interest rates in both the single and multifamily housing markets. Many homeowners and investors were able to take advantage of these rates to purchase or refinance their properties. However, now that rates have risen one might ask what their effect is on the financial performance of a given property? Here are a few ways that higher rates can impact a multifamily property.
Effect on Cash Returns
As investors are required to pay higher and higher interest rates, the cash returns on properties will naturally be lower. While these lower cash returns will not effect the NOI of the property and therefore not directly effect the value, the lower cash returns could cause a rise in CAP rates which would effectively decrease the value of the property.
Effect on Occupancy
While the first effect might be a negative for multifamily investors, the next two points are positives. In fact, many investors would say that these positives far outweigh the negatives in an economy where rates are on the rise. When we consider the effect of higher rates on occupancy, we see a scenario where more and more people are choosing to rent instead of buy a house. This is because the higher rates result in the buyer not being able to afford as large of a house and thereby discouraging or even prohibiting them from purchasing. Many of these individuals will instead rent an apartment which will drive rents and occupancy both higher.
Effect on Inflation
Rising interest rates are often correlated with rising inflation. The purchasing power of a dollar is diminished in a market with high inflation which means investors will not want to hold a substantial amount of cash. Real estate offers the opportunity to ride the wave of inflation by placing cash in a hard asset that will appreciate in value as the value of the dollar diminishes.
Every market phase has it own positive and negatives effects to consider when investing in real estate. What's interesting is that with the strong execution of a business plan tailored to the current economic environment, any point in the market cycle can be profitable to investors.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."
