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Rising Interest Rates

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Are Rising Interest Rates A Bad Thing   by Jeff Davidson

Not necessarily for a long-term investor. Read on as I explain.

Surprise! Interest rates are on the rise. Not properly planning can ruin your cash flow and your real estate business. So what should you do if your trying to get financing in an upward trending interest rate market? Well the quick answer is to lock in the rate for as long as possible. Theory states that in a rising interest rate market there are fewer buyers and more renters. This should increase the demand for your rental property thus increasing your rental rate. After a few years of rental increases your cash flow will sky rocket.

Let's just say you buy a house, lock in the rate, and with all payments your monthly expenses are $1000. You have it rented out for $1100 per month for a net cash flow of $100. The rates are on the rise, the economy is good, but the increases in interest rates have started to price people out of the buying market. Rental demand begins to increase. You are able to increase your rent by 5%. What effect do you think that will have on your cash flow? The answer: a cash flow increase of 55%. Not bad!

So how did we do it? When you increase your rental rate by 5% that would give you $1155 per month in income and your expenses stay the same at $1000. Your cash flow just went from $100 to $155. A few years of this and you are on the golden path. This is one of the reasons I have a buy and hold philosophy.

There are however, people who want to flip property to make a profit. This is certainly possible and a great way to build up cash when you are first starting to invest in real estate. In this case you really want to keep your expenses to a minimum. I would certainly try to get the lowest possible rate. I would also advise you to look for a silent investor that can invest the money and wait for the return after the completion of the project.

So my recommendation is to lock in the rates, buy good properties in good neighborhoods and hold on as long as you can. This will put time on our side. And remember investors are all just trying to beat time. With proper planning and cash flow management you can put time to work for you.

About the Author

Jeff Davidson is a real estate investor in the mid-west. He has been investing in real estate since 1994. He runs a website that sells proforma software