THE BLOG
10/28/2013 03:39 pm ET Updated Jan 23, 2014

Are Inflation and Mortgage Interest Rates Killing the Party?

It's all over right? The most recent glory days of real estate investments, when we could buy foreclosed homes for pennies on the dollar are disappearing fast with shrinking foreclosure inventories. We can't hire construction trades people on-the-cheap as easily either, as they are finding jobs in improving real estate markets. This increases our fix-and-flip costs.

With an improving economy we're seeing interest rate increases as well. It looks like the party's over right? Well, not my party!

If you leave this party too soon, you'll regret missing some great fun. We humans tend to make decisions based on the information right in front of us, and we sometimes have a tough time looking at "today" from a historical point of view. We also discount what's come before as no longer applying in today's world. These are big mistakes, particularly when we're looking at real estate investment in the post-crash recovery, currently underway.

Inflation will Ruin the Real Estate Investment Party

Inflation is defined as increases in costs of goods and services. Goods and services are what home building is all about. The cost of a home is the result of material and labor costs, and new home prices generally rise in tandem with inflation. When new homes become more expensive, more buyers move to existing home purchases, and those prices start to rise. If you're a rental property investor, your rental homes are increasing in value right along with inflation.

That's nice, but the party must be over for buying rental properties if prices have risen, right? Not at my party, as I'm buying a rental property with multiple profit streams in mind, and equity appreciation is only one of them. In fact, the monthly cash flow from rents is your major objective. When home prices rise, rents normally rise as well. Rising prices move more people to renting, and this increase in demand raises rents. We take our rent checks to the bank without complaints. Just because you have to pay more for that 2 BR, 2 BA rental home this year than last doesn't mean that your profit stream has been damaged in any way.

Rising Mortgage Interest Rates Send Partiers Home

Let's take a breather from crying over rates rising a point or so and think about historical mortgage rates. Rental property investors were making money when rates were higher, even when they were double what they are today. Sure, it makes it more of a challenge to buy right and to get that positive cash flow we want. Calculating what you lost from yesterday's rates to today's is like crying over getting to the fair two hours after the gates open. There's still a lot of fun to be had in the remaining hours.

Like inflation, rising mortgage interest rates change home buying habits. Rising rates push buyers out of the market, and those buyers become renters. More renters put upward pressure on rents and the rental property investor profits. If our monthly debt service cost rises but our rents rise with it, it's still a party.

Real estate investing enjoys another great advantage over other asset classes. If we experience an increase in mortgage interest rates and our cash flow will be damaged, we have control over structuring our next investment. We can take a more aggressive approach to our purchase and buy at a steeper discount. Reduction of our cost can bring the investment back in line with our cash flow goals if we're paying a higher mortgage rate.

The recovery following the real estate and mortgage crash is expected to be prolonged and not the "boom" experience that preceded the crash in 2006. Sure, interest rates and inflation will fluctuate over the next five to ten years, but you have the ability as real estate investors to adjust your techniques to adapt, and this party can go on for a long time. I've been throwing a real estate investment party for years now and no matter what the markets do or how they fluctuate, I'm always having fun and making money. I just modify the theme and refreshments to fit the guests.

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