by Ankit Duggal
People tend to forget that what goes up eventually comes down. Similarly, low interest rates may have been satiating your investment appetite for some time, but eventually entropy prevails, and the economy usually rebounds.
The interesting thing is that most people try to pull money out of real estate as soon as they hear word of higher interest rates; little do they know that this isn’t always a negative sign. The general conception is that high and rising rates affect apartment building owners, commercial real estate, and offices.
Don’t follow the herd mentality and understand that rising rates aren’t exactly equivalent in magnitude to a zombie apocalypse. Imagine what that would do to the real estate market!
A cursory look at the current history indicates that interest rates don’t stay low forever; however, a major difficulty is faced in predicting the speed at which the rates rise. This obviously doesn’t mean that an investor should stop paying attention to interest rates, as that would mean investing with one hand tied behind your back. Not that you literally need both your hands to invest money, but hopefully you get the point.
The Right Approach
The right approach involves asking the correct questions. For example, why are the rates rising? Different reasons may indicate differing scenarios or triggers, and while some may be disadvantageous to your situation, others can be beneficial as well.
A gradual increase in interest rates is not necessarily a bad thing, as it may indicate that the economy is recovering, and growth in economy means higher demand for real estate. As a result, land owners will be able to charge higher rents and maintain low vacancy rates, which should be a priority for all land owners, as they are crucial to maintaining a steady income and ensuring that a good rental yield is secured.
This is probably no secret and it may sound quite clichéd, but you need to be prudent when it comes to real estate investments. Thus, if you know that the interest rates are about to rise and you can refinance your property, do it. A good practice is to secure your mortgage at the current rates before they rise. It is also wise to pay off your loans and fix your credit score.
Debt Service Coverage Ratio
This is one of the main components of debt underwriting in corporate finance and is the amount of cash available to cover yearly interests and expenses. In personal finance on the other hand, it refers to the loan amount ratio loan officers use to determine how much a debtor can pay according to certain factors. It’s typically calculated by the formula:
DSCR = Net Operating Income/Debt Services
In which Net Operating Income is the net income, interest expense, cashable plus non cashable and amortization and depreciation. The Debt Services include the principal repayment, lease and interest payments.
You can use the debt service coverage ratio as a guide to determine your maximum proceeds. Plus, the higher this ratio is, the easier it is to obtain a loan. As a rule of thumb, consider 1:30 as a debt service coverage. Since lenders typically use this to analyze the proceeds a certain property might be privy to, it has a large hand in determining the loan amount. In other words, you can easily calculate how much you can profit by using this coverage.
So stop conforming to the herd mentality, embrace your investor individuality, follow the advice and protect your portfolio value!
Investors: How do you react to rising interest rates?
Leave your comments below!
Interested in Finding out More? Reach out below
Address: 1415 Main St. #823, Grandview, MO 64030
This information is intended only for the use of the intended recipient(s) and it may be privileged and confidential. Please note that any views or opinions presented in this post are solely those of the author and do not necessarily represent those of the company. This is reposted information and is not original thought of Ireland Investments or anyone associated with the business.
Popular areas we service;
Kansas city Missouri, Overland Park Kansas, Kansas city Kansas, Olathe Kansas, Independence Missouri, Shawnee Kansas, Blue Springs Missouri, Lenexa Kansas, Leavenworth, Kansas, Leawood Kansas, Liberty Missouri, Raytown Missouri, Gladstone Missouri, Grandview Missouri, Belton Missouri, Prairie Village Kansas, Gardner Kansas, Raymore Missouri, Grain Valley Missouri, Ottawa, Kansas, Lansing Kansas, Excelsior Springs Missouri, Merriam Kansas, Harrisonville Missouri, Cameron Missouri, Mission Kansas, Kearney Missouri, Smithville Missouri, Pleasant Hill Missouri, Oak Grove Missouri, Bonner Springs Kansas, Roeland Park Kansas, Parkville Missouri, De Soto Kansas, Richmond Missouri, Greenwood Missouri, Paola Kansas, Basehor Kansas, Tonganoxie Kansas, Odessa Missouri, Peculiar Missouri, Platte City, Missouri, Higginsville Missouri, Lexington Missouri, Edwardsville Kansas, North Kansas City Missouri, Osawatomie Kansas, Louisburg Kansas, Fairway Kansas, Mission Hills Kansas, Sugar Creek Missouri, Riverside Missouri, Buckner Missouri, Pleasant Valley Missouri, Lawson Missouri, Plattsburg Missouri, Lake Lotawana Missouri, Weatherby Lake Missouri, Wellsville Kansas, Edgerton Kansas, Westwood Kansas, Garden City Missouri, Gower Missouri, Claycomo Missouri, Lone Jack Missouri, Drexel Missouri, Lake Tapawingo Missouri, Glenaire Missouri, Dearborn Missouri, Avondale Missouri, Osborn Missouri, Sibley Missouri, Oaks Missouri, Unity Village Missouri, Levasy Missouri, Randolf Missouri, River Bend Missouri, Jackson County Missouri, Johnson County Kansas, Clay County Missouri, Wyandotte County Kansas, Cass County Missouri, Platte County Missouri, Leavenworth County Kansas, Miami county Kansas, Lafayette County Missouri, Ray County Missouri, Clinton County Missouri, Bates County Missouri, Linn County Kansas, Caldwell County Missouri, Crossroads Real estate, 18th and vine Real estate, Hospital Hill real estate, library district real estate, longfellow real estate, dutch hill real estate, quality hill real estate, river market real estate union hill real estate, Greater downtown KCMO real estate, East Side KCMO real estate, Midtown KCMO real estate, Westport Real estate, Hyde Park real estate, Northeast KCMO real estate, Northland real estate, Plaza Real estate, South Kansas City Real estate, Fairway Kansas real estate, Kansas city Kansas real estate, lake quivira Kansas real estate, Lenexa Kansas real estate, Mission hills Kansas real estate, overland park Kansas real estate, prairie village Kansas real estate, Shawnee Kansas real estate, weatherby lake Missouri real estate, westwood Kansas real estate