The Fed Cut Rates. What Does This Mean For Real Estate Investors?
Recently, Federal Reserve Chairman Jerome Powell announced a 0.25% reduction in benchmark interest rates. This was the first cut in more than a decade and came as the booming economy, which has been steadily growing for the past several years, has shown recent signs of slowing. While interest rate reductions are generally a good thing for the economy at large, they can have mixed effects for real estate investors. Knowing the specific impacts this policy change will have allows you to effectively (and profitably) navigate these waters.
When interest rates are lowered, it becomes easier and cheaper to borrow money. Lending standards tend to relax, and people who were previously sidelined because of poor credit, lack of down payments or other, similar reasons have an opportunity to borrow that was previously unavailable. It’s easier for these borrowers to approach big banks, and financial institutions begin to lend more at lower rates. So you don’t want to compete directly if you’re involved in lending money to real estate investors. You would have to decrease your interest rates and increase your risk to stay competitive with institutional lenders.
However, you can capitalize on this by focusing on opportunities to build on undeveloped land, increasing the housing supply. Flipping homes also becomes more profitable. As more buyers enter the real estate space, your focus should be on facilitating those transactions by increasing the housing supply. Not only do you have access to more customers, but increased demand also traditionally means higher prices when you go to sell your flipped property.
If you already have an established rental portfolio, use this rate cut as an opportunity to refinance wherever it makes sense. Begin with your loans with the highest interest rates, and focus on slashing payments wherever you can. When rates are cut, pass off lending costs and risks to financial institutions. When rates eventually rise, you can begin to compete with banks in the lending sphere, taking the risk (and the associated profit) on yourself by lending money to other investors for a more passive income stream.
Because both direct and long-term lending costs are cheaper in this environment, consider increasing your housing portfolio by purchasing more properties. These can include every type of real estate, from undeveloped land to flips to rental properties. Remember, though, that the most significant opportunities in this environment are realized when you facilitate transactions with people who have been most affected by the policy. In this case, these people are the formerly disenfranchised borrowers who now have a realistic shot at owning a home. Buying rental properties isn’t a bad move here, but purchasing real estate that you can resell at a profit is infinitely better. So, this means the rate cut is good for those looking to flip properties, as more buyers will enter the market.
You can also use this as an opportunity to sell some properties in your rental portfolio. Get rid of high-priced, low-cash-flow properties as demand increases, exchanging them for lower-cost, high-cash-flow real estate. Consider the risk associated with each property if it were to sit empty for any significant amount of time. The higher the price each building carries, the more of a liability it has associated with it. It is much wiser to spread your risk out among lower-priced properties that have higher cash flow.
Finally, this means that some traditional investing mechanisms (such as Treasury bonds and bills, CDsb and savings accounts) will become that much less attractive to consumers due to the low returns. Consequently, more people will be interested in nontraditional investment mechanisms, such as private lending to real estate investors where the passive return is secured and often three to five times higher than that of T-bonds.
Heraclitus wrote that “change is the only constant in life.” Our response shouldn’t be to fear change, but rather to understand it. And as Dolly Parton once said, “We cannot direct the wind, but we can adjust our sails.” This rate cut is neither a good nor a bad thing for real estate investing. It is merely a change, and your goal should be how to adjust your investment approach to maximize your profit.