Is inflation of out control? Find out what 9.1% CPI means for your real estate investments 

In case you haven’t already heard, the CPI, or Consumer Pricing Index data is in for July 13 and it is higher than expected. After coming in at 8.6% last month, it was projected that the CPI would increase to 8.8% this month. Numbers actually came in even higher than projected at 9.1%. What does that mean for your real estate investments and what do you need to do to be prepared? 

‍What will happen to interest rates and what does this mean for investors?

‍The number one tool the Federal Reserve has to counter inflation is raising interest rates. By raising interest rates, the cost of money becomes so expensive over time, essentially lowering the amount of money in the economy and hopefully calming inflation down. It is likely that we will see an increase in interest rates at the end of the month following this higher-than-expected CPI #. If this is the case, what does this mean for people who are currently investing in real estate syndications? 

Over the past couple of years, a large portion of loans used to purchase investment properties were bridge loans, meaning they have variable rates that fluctuate as interest rates go up or down. These were common because when rates were low, it helped maximize the return on the investment. An increase in interest rates means higher expenses for these properties. This may cause syndicators who were not conservative in their underwriting and didn’t account for such factors to fall short of their business plan.  
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Knowing how to account for these potential market conditions when underwriting a deal is critical to minimizing your risk. At Smart Wealth Equity, we stress test every deal with conservative numbers and worse case scenarios at hand. By placing these into our underwriting model, we are still in a position to perform for our investors if a variety of things were to go wrong. 

‍What could happen to rental rates?

‍One advantage of multifamily real estate is that rental rates often increase in a rising interest rate market. As interest rates rise, 30-year fixed mortgage rates typically go up. When adding higher interest rates to home prices that are already at an all-time high, there is a larger percentage of the population that cannot afford to own a home. An increase in people who are required to rent puts more pressure on rental rates, especially in a market where affordable housing is already short in supply. Through this trickle of events, we often see a rise in rental rates occur. As mentioned earlier, however, we always work with conservative numbers when underwriting a deal and therefore don’t build an abnormal increase in rental rates due to these conditions.

Rising interest rates don’t necessarily mean that it is a bad time for real estate investments, so long as the deals are conservatively and meet specific criteria. It is critical to understand current market conditions and trends, so you can know how to make adjustments in your underwriting strategy, and always assume the worst case scenario. This will give you the best opportunity to meet the goals of your business plan during times of worsening conditions and allow you to come out on top if conditions remain steady or improve. 

Want to learn more about a different way to invest in real estate? Download our FREE Passive Investor's Guide to Multifamily Syndications and begin your path to financial freedom!