The way the U.S. Federal Reserve sees it, increasing interest rates is a sign of a strong economy and a hedge against inflation. Or, in the case of this year, a means of hoping the economy gets stronger.
“My main message has not changed since Jackson Hole,” Fed Chair Jerome Powell said after the latest 0.75% rate hike in September and warned he’s not done yet. “The FOMC (Federal Open Market Committee) is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”
And those who claim what the Fed does is not affecting mortgage rates aren’t paying attention as the current home mortgage rate, after a momentary dip, is now over 6.5%.
Unsurprisingly, all of this is affecting investors and how they look at the housing market. It’s a conundrum as loans become more expensive while rent costs rise — a boon for multifamily property owners. And while some investors see short-term gains in the rental market, others are concerned about what this strategy does to the overall landscape.
“I’m seeing an increasing amount of single-family homes turned into rental properties, and while I don’t begrudge investors being opportunists, I do worry this is undermining home ownership and the American dream,” Detroit area lawyer and landlord advocate Matthew Paletz of Paletz Law said. “It’s a manic duality. One day it looks like rents are going up, and then the housing market goes from gangbusters to a cliff. There is a lot of conflicting data right now, driven by movement and by emotion.”
Paletz told Benzinga that he hasn’t seen a strong selloff or buying strategy emerge from his landlord clients in the current environment but says two years of rent moratoriums have made them “fatigued.” Some are contemplating “cashing out.”
There is also a new wave of investors who aren’t buying rental homes and apartments and are looking at fractional investing options with companies that take away the necessity of comparing mortgage rates, down payments and lenders. Did you know you can invest in rental properties for as little as $100, and make passive income? Benzinga has you covered, check this out!
However, traditional owners are focused on adhering to principles that work in any market, like ensuring properties are fully leased to tenants who pay their rent on time. And that factor is many times determined by how much due diligence is paid to prequalifying future tenants, including credit scores or debt-to-income ratios. One multifamily investor said his own less-scientific strategy to prequalify tenants is to look in their cars and see how they’re taken care of. He said he found that people who can’t take care of their cars won’t take care of his properties and will probably be late paying rent.
And at the end of the day, you can factor in all you want, from prequalifying tenants to current interest rates, and real estate investors still have to place one factor above other considerations.
“It’s still about location, location, location,” Paletz said. “That said, there’s no one-size-fits-all investment scenario. You have to look at financial liquidity and what is perceived on the horizon, whether it be the upcoming election, interest rates, societal changes or continual supply chain interruptions and staffing shortages.
“The bottom line for real estate investors is that we are living right now amidst a cocktail of uncertainty, and making sound investment decisions during uncertainty is less likely a recipe for success.”
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