Let’s face it. The Fed’s recent announcement of accelerating “tapering”, is a big sign that higher interest rates are coming. We will break down how this influences today’s investment marketplace and why you should buy your investment properties now (before interest rates rise even further).
What’s happening in the market?
The Federal Reserve announced a quicker timetable for reducing the stimulus it has provided to support the economy throughout the coronavirus pandemic, as inflation rises. The Federal Open Market Committee (FOMC) said it would reduce its monthly purchases of Treasury bonds and mortgage-backed securities at a faster pace than previously planned. In addition, Fed officials predicted three interest rate hikes in 2022, accelerating their anticipated timeline for increasing borrowing rates.
Here are some key takeaways:
- United States inflation rose to 7.0% in December 2021, which is the highest since 1982
- The Fed is tapering from an est. $120 Billion in monthly purchases of Treasury bonds and mortgage-backed securities. The Fed expects this reduction of purchases to reach $0 in March of 2022.
- The Fed predicts it will raise short-term interest rates at least 3 times in 2022. This should drive interest rates on long-term mortgage products up in the near future as well.
- The stock market is poised for a correction as Price-to-Earnings ratios are more than 2x historical levels.
- Despite rising rents, returns on investment for rental properties in 2022 won’t be as high in 2022 as we have experienced in 2021 due to the effect of rising interest rates and increasing home prices.
Why shouldn’t I wait to build my rental portfolio?
Rental properties are a great way to build your net worth over time, especially if you take advantage of the current market conditions. As interest rates rise, rental property investors will be faced with rising monthly mortgage payments- affecting their ability to create generational wealth. If you plan on buying investment properties in 2022 or beyond, interest hikes could put pressure on the cash flow of the rental properties.
For comparison, we did the math on a real property our client recently purchased through us. Using the conventional financing model, we estimated a decrease of 33% in ROI simply because of a 1% increase in interest rates.
Knowing the facts and expert predictions, if you plan to purchase properties in the next 1-3 years you should seriously look at accelerating your buying plan now in order to lock in low-interest rates and maintain optimal return on investments.
In addition, many investors are concerned with a correction in the stock market due to a tightening of the money supply by the Fed as well the current inflated price-to-earnings ratios. We’re working with those clients to divest a portion of their holdings out of the stock market and use those funds as down payments for additional purchases in their rental property portfolio. By locking in the low interest rates today and potentially avoiding the correction in the stock market, clients are able to preserve and grow their wealth and while reaching their passive income goals in a shorter timeline and with less variability.
The economic signals and current real estate market dynamics are strongly indicating that home prices and interest rates will rise in 2022. As investors, we can use this information to create positive (or negative) outcomes for the hard-earned dollars we are putting to work.
If you are looking to purchase property within 2022 or beyond, waiting might not be the best option. Real estate investing might not be for everybody, but if you have a solid plan and an understanding of markets, real estate is one of the most useful tools in your financial arsenal – especially today.
How can I take advantage of the low interest rates before it’s too late?
JWB can help! With our guidance, clients acquire turnkey rental properties with long-term tenants in place, providing immediate cash flow and the potential for property appreciation. The real magic happens with our full-service property management- with an average resident stay of 4.5 years and a 98% occupancy rate. It’s truly a stress-free investing experience!
We welcome you to browse our featured property listings and when you’re ready to grow your portfolio, schedule a strategy session with our team of experts to learn how simple the process is from start to finish.