Are you feeling the impact of inflation on your daily expenses? You might be interested to know that inflation can also significantly affect your investment strategy, especially when it comes to multifamily real estate. As a savvy investor, it’s crucial to stay ahead of the curve and consider how inflation affects the debt market.
I know, inflation isn’t the most exciting topic, but trust me, it’s an essential factor in protecting and growing your investment portfolio. So, let’s explore some key things you should keep in mind when investing in real estate during inflationary times.
Understanding Current Interest Rates in the Debt Market
First, you need to accept that higher interest rates might be here to stay for a while. While we, as sponsors, work with lenders to find creative ways to lower the interest rate, it’s not always possible. In most cases, we have to accept the market rate and use it to underwrite the deal. The key is to focus on deals structured around these higher rates and avoid forcing a deal that doesn’t make sense.
The Interaction Between Interest Rates and Property Valuation
Keep a close eye on how inflation affects property values. Be aware that they don’t always keep up with inflation and can even decrease during high inflation periods. It’s crucial to research the debt market conditions in the areas where you’re investing and understand how inflation is influencing interest rates there.
Remember that property values tend to rise in the long term, even with short-term fluctuations. One challenge sponsors may face during higher interest rate periods is that sellers might still price properties based on last year’s lower interest rates. We are patient and wait for the market to adjust.
Historical Real Estate Returns
Real estate has performed just as well as, if not better than, the S&P 500 Index over the past two decades. Despite temporary downturns like the 2008 financial crisis, real estate valuations have consistently bounced back and continued on an upward trend.
The Top Factors to Consider Before Investing
Before diving into a deal, make sure the sponsors underwrote it based on the current state of the debt market. Don’t rush into a deal just because it seems like a good opportunity. Take your time to analyze the deal, ask questions from the sponsor: consider current interest rates, and evaluate the investment’s dynamics. Remember, a good deal is only good if the numbers support it.
Navigating Interest Rates and Real Estate Deals
Investing in property is like playing a game of numbers. Make sure the sponsors look at current interest rates and how they’ll impact the investment. Don’t let high-interest rates deflate your return on investment (ROI). Examine each deal carefully to see if it makes sense for you in the long run.
The Calm After the Storm: What Happens When Rates Go Back Down
Interest rates are just one factor that can affect your investment strategy. If you’ve already in a deal and interest rates drop in the next few years, the team might be able to refinance and enjoy increased cash flow and profits. However, remember that the deal must have worked with the higher interest rates initially. Make sure the sponsors are staying on top of other factors, such as property conditions and debt market trends, to make more informed decisions.
YESMF, it’s always a good idea to consult with a financial advisor who can provide personalized advice based on your risk tolerance and investment goals. This will help ensure you make the best possible decisions in the ever-changing world of real estate investing.