Posted on February 2, 2016
Real Estate Investing in a Recovering Economy
Last month the Federal Reserve announced that it would raise short-term interest rates to a modest range of 0.25-0.5 percent. In efforts to boost the ailing economy, interest rates were at a low near zero percent for the past ten years. The recent decision is meant to signal confidence in the the American economy and its growth, reports the New York Times. Fed officials also announced that interest rates will gradually rise as the economy continues to grow in the upcoming years. However, Fed Chairwoman Janet L. Yellen cooled overly enthused reactions, signaling that despite economic recovery progressing, it is still not complete. “The economic recovery has clearly come a long way, although it is not complete,” said the Fed’s chairwoman. Nevertheless, increasing interest rates will surely affect the real estate investment sector onward.
The real estate industry is always held at the whim of American economic forces. If you are a landlord planning to borrow money as a mortgage, or a landlord hoping to rehab a home into a profitable sell, your cost of doing business will surely increase. However as the economy strengthens, so will the demand for rental units and home ownership. As the demand for rental units and homeownership rise, so do property values, profiting real estate investors. A stronger economy inevitably means profitability for landlords, despite rising interest rates.
As for REITs, conventional wisdom would suggest that rising interest rates negatively impact REITs. However according to wealthmanagement.com, this isn’t necessarily true 100 percent of the time. Contrary to expectations, REIT stocks outperformed the overall market the last time the Fed raised rates. In fact, during that two year period when rates rose, REITs saw returns of over 60 percent, outperforming the S&P 500’s comparatively low 20 percent. From this, we can conclude that the rule that applied for landlords also applies for REIT investors: as the economy strengthens, so does the value of rental units and property values.
Home, office, and retail REITs all have the possibility of boding well in light of the forecasted economic bolstering underway. Economic growth means higher consumer spending as well as job growth, positively affecting office and retail property investors. As an investor in properties, it is important to first weigh whether the anticipated earnings from monthly rents will be sufficient to offset higher mortgage, and maintenance costs. In Leveraged property investments, higher lender rates generally mean lower returns. Again however, a strong economy and an increased demand for commercial space will result in higher rents and a better valuation for your property.
As a an investor in the real estate industry, becoming a lender can decrease your overall risk. Private lenders can earn between 8-12 percent in interest. However with higher interest rates come higher risks. Brian Kline of realtybiznews.com suggets investing retirement accounts like IRA’s or 401ks in a first mortgage, which provides a high level of security when your investment is secured by the house or property. Keep in mind though, the lower the risk, the lower your interest rate.