Is Buying Real Estate a Good Investment When Interest Rates Rise?Aug 01, 2023
High inflation and rising mortgage interest rates are two debilitating phrases that most Canadians can’t wait to put in the rearview mirror.
Not since the early 1980s has the cost of inflation soared to such expensive prices. The Bank of Canada overnight interest rate hasn’t been so high since prior to the 2008 financial crisis. Consequently, mortgage interest rates are also hovering near 15-year peaks.
Given all this troubling financial data, you’d be forgiven for assuming that real estate investment is a risky bet in these uncertain times. The fact is that there are some amazing real estate deals to be made in these high-rate environments.
Let’s break it down and show you how to make a lucrative real estate investment amidst high-rate markets.
How do high interest rates impact real estate?
As the Bank of Canada raises the overnight interest rate to combat inflation, it has a huge effect on the real estate market. The cost of borrowing grows more expensive, and banks pass on those higher borrowing costs in the form of higher mortgage interest rates.
This has a three-pronged effect on the overall health and vitality of the real estate market.
There’s higher demand for rental properties
Rising mortgage interest rates means a growing number of Canadians will be priced out of qualifying for a mortgage loan. Due to these limitations, demand for rental properties will accelerate because fewer people can afford to buy a home.
Growing demand for rental units equates to a great opportunity for you as a real estate investor. A simple one percent increase in rental demand can boost investment profits by leaps and bounds. We’ll go into that a little further in this post.
Current property sellers have less leverage
The cloud of inflation casts a long shadow over the real estate market. As borrowing and financing costs rise, fewer investors have the means or the desire to pool their capital to invest in a new property.
With fewer investors in a buying mood, owners of existing properties have less leverage to dictate selling terms. Sellers are more willing to negotiate on listed property prices. You can use that knowledge to your advantage when you make a bid for the property.
Geo-target the right neighbourhoods and reap the rewards
Strategic planning is a big part of a successful real estate investment playbook. As the old adage goes, it’s ‘location, location, location.’
The rising cost of living will price some neighbourhoods out of many Canadian tenant’s budgets, especially in larger cities like Toronto, Montreal, or Vancouver. Outlying communities further away from downtown cores will be affordable, driving up demand for space in large rental properties.
Use this strategic geo-targeting approach to find properties that can attract the greatest share of residents. Investing near future public transit locations will also increase the rate of return on your investment when those projects are fully developed.
How to take advantage of investing in high rate environments
So what can you do to capitalize on these high interest rate environments? Here are a few helpful tips to guide you on your real estate investment journey when costs run high.
Make multifamily properties the cornerstone of your investment strategy
People who are new to real estate investing often select single or semi-detached homes as their first venture into the market. Reasons for these decisions vary by investor, but the general logic is that they’re easier properties to maintain.
However, you’re robbing yourself of vast income opportunities by shying away from multifamily properties. Unlike single or semi-detached investments, multifamily properties have dozens or even hundreds of tenants paying rent every month.
Passive income and inbound cash flow are more stable and reliable with multifamily properties. If you have one bad tenant who falls behind on rental payments, it’s not going to impact the financing you incurred to pay for the property. Rent delinquency from a single tenant means you may fall behind on your mortgage payment.
Also, remember that rising interest rates mean fewer people can afford to buy homes. There’s greater demand for rentals in large apartment or condominium properties. Use that knowledge to your advantage and get yourself into multifamily real estate investments.
Negotiate with sellers using future interest rate hikes as leverage
The Bank of Canada remains fixated on bringing the cost of inflation down when it runs out of control. Increasing the overnight interest rate is the biggest tool in their arsenal to wage the war against inflation.
You can use the speculation over future interest rate hikes as you negotiate a real estate purchase. If a property has been listed for a long period of time, the seller is fully aware that they have a limited pool of potential buyers in play. Should rates rise again before the property is sold, it puts sellers in an even tighter bind.
Make sure that you deploy your negotiation skills like a master. Research the number of potential buyers in a building before you make your own bid for the property. Find out how long the seller has listed the property on the market. Remember that sellers have more incentive to take lower offers if the property has been listed for a long period of time.
Do the math and calculate how much of a risk the seller will take by walking away from your aggressive offer. With a little research, you can negotiate a great price for the property.
Join a community of experienced investors for little-known tips and tricks
Finally, keep in mind that real estate investing is a big undertaking. Investing when high interest rates change the lay of the land is an additional curveball thrown into the mix.
Rather than conduct your entire journey alone, consider joining a thriving real estate investment community. You can learn about success stories from experienced investors, and you can even partner with a coach to learn the best negotiation tactics when financial costs are on the rise.
Don’t let the cloud of uncertainty regarding inflation and interest rates get in the way of building your real estate empire. Learn from the best and brightest, so that you can acquire valuable properties and build generational wealth!
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