Up, Up, Up – Rising Interest Rates
Next, let’s talk about interest rates – another source of stress and worry for many people. But just as with inflation, even though rising interest rates might SEEM scary and bad, in actuality, there’s tremendous opportunity right now, while interest rates are still relatively low.
As you likely know, inflation and interest rates are often tied together. This latest period of high inflation has caused the Federal Reserve to embark on what may become its fastest series of interest rate increases in over 30 years, with signs of more sharp rate hikes to come.
And again, while this may seem terrifying, and your natural inclination might be to stop everything and crawl under the covers and hide, the actions you take now will play a critical role in your wealth and financial future.
The Best Real Estate Investment Opportunities Right Now
We already know that interest rates are going to continue to go up. But at the moment, they’re still relatively low and palatable, which means it’s the ideal time to invest, before interest rates get too high.
If you can find investment opportunities with fixed-rate interest (or variable rate interest but with a cap), then you are protecting yourself against future rate hikes. No matter how high those interest rates get, you’re locked in, which is an incredibly smart way to hedge against inflation.
The Impact Of Interest Rates On The Broader Real Estate Market
Further, what this means for real estate is that, as interest rates rise, affordability will fall. In other words, buyers will need to lower the offers they put in when trying to buy assets. However, sellers may not be willing to take those lower bids, so they might just hold on to their assets and decide to ride it out for the next few years.
Sure okay, you’re thinking. So sellers may not be willing to sell, and there may not be as many properties for sale. But what does that have to do with me? Great question.
Remember back a few paragraphs when we were talking about inflation? And remember how I said that you need to make sure your money is working FOR you and not losing value? Well in order to do that, you need solid investments to put that money into.
And if deal flow will be tightening in the coming months and years, there may not be as much opportunity to invest your money, even if you wanted to do so.
So what that means is that NOW is the time to take action. Now, while most people are still scared and frozen, while there are still great investment opportunities available, before interest rates climb too high.
The Importance Of Investing In Deals With Fixed Rates Or Variable Rates With A Cap
When evaluating potential real estate investment opportunities during this current climate of rapidly rising interest rates, you should definitely get clear on exactly how the loan is set up.
If the debt comes with a fixed interest rate, you’re golden. That means that, no matter how high interest rates get, those loan payments will not change, meaning your investment will not be at risk due to sudden increases in monthly mortgage payments.
If the debt comes with a variable interest rate, that’s good too, as long as there’s a cap in place. For example, if the loan comes with a 4.5% variable rate but with a 5% cap, that gives you the assurance that, even though the interest rates may go up, there’s a limit to how high they could get in this investment.
Any good sponsor will have run multiple underwriting scenarios to account for any variability with the interest rates, so be sure to ask for full details there.
In either case – with a fixed rate or with a variable rate with a cap – you are taking advantage of the still-low rates to put your money to work for you before interest rates spike and inflation causes your money to lose value.
What Would Happen If You Took Zero Action
If, on the other hand, you were to sit on the sidelines because you’re not sure what will happen, and in the meantime interest rates and inflation continue to climb, you could find yourself in a real pickle very soon.
If interest rates were to rise significantly between now and the end of the year, that could mean that…
A. The investment opportunities that come across your desk would likely have MUCH lower returns (and thus not be as great of a hedge against inflation), or…
B. The returns might still be relatively high, but the deals would likely come with substantially more risk
That’s why, if you have capital sitting idle right now, this is the BEST time to take action, even in the face of fear and uncertainty. In a few months’ time when interest rates are significantly higher than they are now, you’ll be grateful you took action to protect your money.
A Potential Recession On The Horizon
Okay, now that we’ve walked through inflation and rising interest rates, let’s talk about recession – what it is, what it means for real estate, and what it could mean for you and your money.
A recession, then, is a period of at least six months when GDP goes down rather than up. When GDP climbs back to pre-recession levels, the recession is over.
Right now, as I write this in May 2022, we are not technically in a recession (yet), though many experts predict that, with the combination of high inflation and rising interest rates, we could be heading into a recession in the near future.
Thus far, the job market and consumer spending remain strong, but with the Federal Reserve signaling further rate increases needed to cool the economy in the coming months, consumer worry and doubt are starting to set in.
What Happens If You Lose Your Job
One of the biggest fears during a recession is losing your job. Massive layoffs are typically the first stage of a recession, meaning that many people may lose their primary source of income.
For investors who have created multiple streams of passive income, however, that additional income can be key in helping them to ride out a recession, allowing them to maintain financial security even if they are laid off.
When facing a potential recession (and thus the potential for losing your job), your natural tendency might be to hold tight to the status quo. In other words, hang on to as much of your savings as possible, so it’s there for you in case you need it.
And I totally get it. The money seems “safe” when it’s sitting there and available for you.
The problem is that, with sky-high inflation, that money continues to lose value every day that it’s sitting there, which means you could be missing out on tremendous opportunities to protect your capital, hedge against inflation, and build wealth for your family.
Ensure You Have An Emergency Fund, Then Invest The Rest
I’m not saying you should go out right now and invest every last penny you have. That would not be very smart. You do in fact need some savings – an emergency fund, if you will.
So start by figuring out how much you need in that emergency fund, to give you enough runway to ride out a few months, if you needed to.
Then, with whatever money you have above and beyond that, take action now to put that money to work for you before it’s too late. Take confidence in knowing that your emergency fund is there as your safety net, but the rest of your funds are sitting there as lazy money until you put it to work for you.
Once you set aside your emergency fund and find strong investments for all your remaining capital, you hedge against a potential downturn, protect your capital, and put yourself and your family in the best position to face whatever is to come.
What You Should Be Doing Right Now
The last 2+ years have been a whirlwind. Between the pandemic, global conflicts, supply chain issues, inflation, and so much more – I get it, you’re tired. Every ounce of you wants to crawl under the covers and make it all go away.
Trust me, we’re right there with you.
But the fact of the matter is, as much as we may want to, we can’t just wish away these big hairy global problems. And they ARE going to impact you, your family, and your future – whether you’re ready or not.
The question is whether you will seize this opportunity to take control of the outcome and make sure you’re in the best possible position to face what’s to come, or whether you’ll let fear hold you back and thus suffer the consequences as the world and economy continue to shift.
I know it’s hard. I know you’ve got a ton of things going on. I know you want to run away. But listen. I wouldn’t be here writing this if I didn’t think it was supremely important for you to hear this.
Things are hitting the fan right now and will continue to hit the fan in the coming months and years. I want to make sure you’re empowered to do everything that’s needed to set you and your family up for success and come out on top at the other end of this.
Next Steps – Take Action
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Passive Real Estate Investing 101 – or to get a free hardcover copy of our book –
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And remember – great fortunes have been made and lost in turbulent times like this. Now is your opportunity to write your own story and determine your path through what’s to come.
Whatever you do, just make sure you do something. Taking action and facing the monsters are critical, now more than ever.
If there’s ever anything we can do to help you on your journey, feel free to email us at [email protected] or call / text us at (888) 830-1450.
We’re standing by and always here to help!