30 min
#85: 4 Real Estate Investing Strategies to Combat Rising Inflation Colorado Springs Real Estate Investing Podcast
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- Investing
We’ve seen inflation and interest rates tick up over the past few months, which creates a lot of uncertainty and concern. Many of our clients are coming to us with questions about what it all means and what they should do. Today, we’re going to talk about what we’re seeing, our expectations, and where there are opportunities in the marketplace. The market is changing, but change creates opportunities.
Three Learning Options! * Listen to the podcast "#85: 4 Real Estate Investing Strategies to Combat Rising Inflation" on the Colorado Springs Real Estate Investing Podcast* Watch the YouTube video (at the bottom.) * Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Yes, Inflation Is Climbing
Everyone is talking about inflation lately because it’s definitely going up. Traditionally, real estate is the best hedge against inflation. And since inflation is bigger than all of us, we just have to jump on the train and let it take you where it’s going.
The best way I can wrap my mind around why real estate is the best place to park my money is this: I’m using leverage to purchase a property, borrowing 75-80% of the asset’s value, meaning I’m only putting down 20-25%. If inflation is causing asset values to rise, I get to keep 100% of the equity differential. If a property value goes up $10K, I get to keep all of that equity, even if I only put down 25%. I don’t have to share $7,500 with the lender.
Interest Rates Are Going Up, But So Are Rents
We all know interest rates have been steadily climbing since the end of last year. At the same time, we’re also seeing significant rent growth all over Colorado. This helps with the cashflow spread that is constricted from higher interest rates.
When we fill out our spreadsheets, our usual assumptions are 3% or 4% appreciation and rent increase, but these are no longer the standards. I encourage everyone to play around with the numbers on their spreadsheets and see how slight adjustments change things. How does higher rent appreciation affect your returns?
How Do I Adapt to the Market?
None of us can change the market, so we need to change our strategies. The same approach we took when interest rates were low isn’t going to work in today’s market.
Strategy 1: Should I Look at ARMs?
We haven’t talked about Adjustable-Rate Mortgages (ARMs) because we’ve been spoiled with 30-year fixed rate loans that had historically low interest rates. Now that interest rates are increasing, it’s worth looking into ARMs if you have the risk tolerance for them.
As of the time of this recording, generally speaking, ARM loans can bump your interest rate down pretty significantly. Some people using an ARM could see a .75-1% drop, from ~5.5% to 4.5%. These rates are typically locked for 5-7 years, though the exact terms vary. This can be a good move for an investor who doesn’t plan on holding onto a property for too long, especially if the rest of your debt is locked in at lower rates for 30 years and you have adequate cash reserves.
If you're looking into an ARM, make sure you understand all of the terms of your loan.
Strategy 2: Try a Different Rental Strategy
We’ve seen inflation and interest rates tick up over the past few months, which creates a lot of uncertainty and concern. Many of our clients are coming to us with questions about what it all means and what they should do. Today, we’re going to talk about what we’re seeing, our expectations, and where there are opportunities in the marketplace. The market is changing, but change creates opportunities.
Three Learning Options! * Listen to the podcast "#85: 4 Real Estate Investing Strategies to Combat Rising Inflation" on the Colorado Springs Real Estate Investing Podcast* Watch the YouTube video (at the bottom.) * Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Yes, Inflation Is Climbing
Everyone is talking about inflation lately because it’s definitely going up. Traditionally, real estate is the best hedge against inflation. And since inflation is bigger than all of us, we just have to jump on the train and let it take you where it’s going.
The best way I can wrap my mind around why real estate is the best place to park my money is this: I’m using leverage to purchase a property, borrowing 75-80% of the asset’s value, meaning I’m only putting down 20-25%. If inflation is causing asset values to rise, I get to keep 100% of the equity differential. If a property value goes up $10K, I get to keep all of that equity, even if I only put down 25%. I don’t have to share $7,500 with the lender.
Interest Rates Are Going Up, But So Are Rents
We all know interest rates have been steadily climbing since the end of last year. At the same time, we’re also seeing significant rent growth all over Colorado. This helps with the cashflow spread that is constricted from higher interest rates.
When we fill out our spreadsheets, our usual assumptions are 3% or 4% appreciation and rent increase, but these are no longer the standards. I encourage everyone to play around with the numbers on their spreadsheets and see how slight adjustments change things. How does higher rent appreciation affect your returns?
How Do I Adapt to the Market?
None of us can change the market, so we need to change our strategies. The same approach we took when interest rates were low isn’t going to work in today’s market.
Strategy 1: Should I Look at ARMs?
We haven’t talked about Adjustable-Rate Mortgages (ARMs) because we’ve been spoiled with 30-year fixed rate loans that had historically low interest rates. Now that interest rates are increasing, it’s worth looking into ARMs if you have the risk tolerance for them.
As of the time of this recording, generally speaking, ARM loans can bump your interest rate down pretty significantly. Some people using an ARM could see a .75-1% drop, from ~5.5% to 4.5%. These rates are typically locked for 5-7 years, though the exact terms vary. This can be a good move for an investor who doesn’t plan on holding onto a property for too long, especially if the rest of your debt is locked in at lower rates for 30 years and you have adequate cash reserves.
If you're looking into an ARM, make sure you understand all of the terms of your loan.
Strategy 2: Try a Different Rental Strategy
30 min