We have been looking at interest rates rising steadily since a few months now, and looking at this upward trajectory, it seems like interest will continue to rise going into the rest of 2022. "With inflation running north of 9%, we're not at the finish line and there will be more interest rate increases to come in the months ahead," said Greg McBride, chief financial analyst at Bankrate.com. How does this affect you and your investments? Well, interest rates have a direct effect on the purchasing power of people. When interest rates rise, it is usually followed by a period of rising costs in the economy and marketplace. This means that you need more money for daily expenses and have lesser funds in your bank accounts for investments and other expenses that aren’t immediate.
Does this mean that this is a bad time to buy a house or make real estate investments?
The short answer to this is No! When the economy is in such a state of rising mortgage prices, increasing interest rates etc. it reduces the number of active buyers in the market causing a fall in the asking price of properties. If you have surplus funds that are just lying in your bank account, invest now!
Here are a few advantages of investing during high interest rates –
- Boost your NOI - Rising rates are an ideal way for commercial real estate investors to realize optimal cap rates and improve the NOI or Net Operating Income on their deals. Look for undervalued properties and give them a ‘facelift’ through renovations to increase their market price. In an environment of rising interest rates, there is potential to find inexpensive funding for improvements.
- Tax Benefits - Everybody loves tax benefits and saving on their bucks. This is the ideal scenario for investors to do exactly that! Depreciation on property is one of the biggest deductions that investors can declare. “If you surrender a percentage of income and capital gains on one side of the equation, you can take full advantage of deductions on the other end,” according to leading investment experts. Furthermore, investors can write-off assets not attached to the property, like furniture or appliances, as depreciation over shorter spans of three to five years of time. This reduces the overall impact of increased interest rates.
- Financial Planning Is Key - Real estate experts always suggest starting off investments early on to safeguard financial stability in the long run. Take advantage of the intentionally defective grantor trust (IDGT) to lower taxes and give inexperienced family members experience in the investment market. What is IDGT? It essentially gives the heirs of a property property-ownership while allowing the grantor or patron some control over the property. This is beneficial to both parties as it reduces the taxable estate of the grantor and gives experience to the grantee.
- Sell Assets - Selling dead assets in the ideal thing to do if you want to take advantage of rising interest rates. Because of the uncertainty that rising interest rates bring, buyers ideally look at locking in rates today, rather than waiting for rates to fall tomorrow, as those may go even higher in the future. This makes it a perfect market for sellers to get rid of unneeded property, as they can even ask for a premium which buyers will be willing to pay to acquire property before rates go up.
There are several factors that investors, both buyers and sellers need to consider before investing in real estate. It is always best to take advice from an expert in the field before making any decision. Hiring a brokerage or a real estate agent for their services is always a good idea, as they will be able to match you with the best property for your investment profile.
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