What to Expect With Rising Interest Rates
Prices in the housing market have been rising since March of 2020. While some investors feel that the prices may be too steep, others are taking the plunge. In 2020 and 2021, low interest rates made buying a more expensive property worth the investment. In the end, this translated into a low or manageable monthly payment. However, with interest rates expected to rise this year, where does this leave property owners ready to buy? Here are a few strategies that can help your deal make sense.
Big Cash Down Payments
If you are a property owner of short-term rentals, 2020 and 2021 were great. With many people needing a change of scenery for their work from home offices, the short-term rental market saw a surge in demand, putting larger amounts of cash in property investors’ pockets. If you were one of them, this should leave you with a hefty down payment available to help offset your new rental investment.
Use Equity as Your Down Payment
2020 and 2021 saw almost everyone’s home equity rise. This is good and bad. The bad news is that it may make the purchase of rental property higher than what you may have paid for it 3 years ago, but the good news is that the property you currently own has more equity. This means that you can use the equity in what you currently home as a down payment for your rental property. Additionally, if the home is your primary residence, the interest rates may be lower than what the market would offer otherwise. If the home is another rental property, lenders may offer less money but it still may be better than a traditional loan.
Try the BRRRR Method
If you are looking for a property that is below market cost, try the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). This method assumes that you are looking for a property to renovate and therefore increase the value of the home to a point where the reappraisal process would make it valuable for you to cash out and use the proceeds for your next investment while the unit continues to earn passive income. This process is definitely for the more experienced investor as it assumes you are willing to take on 1) a project, 2) the inherent risk of not renting consistently while there is an additional loan out on the house and 3) a slow supply chain may make the turn around longer than projected.
As interest rates continue to rise, Fool.com believes that this may ease the competition as fewer people are willing to pay those higher interest rates. If you are able to secure a deal that makes financial sense, 2022 may be the year for you.