March Madness.. of the Real Estate Variety…Impact of Interest Rates

We are well into March 2017 and the madness is just heating up. As college basketball teams have navigated the big NCAA tournament, participants in the real estate and corresponding business sectors are also adjusting for the interest rate hike(s) that came from the Federal Reserve this month, with potentially more of them later this year.  But the most important question facing market participants is “How will these rate increases affect me?”
 
Well, let’s look at that question from two perspectives:

Owner/Occupant deals
Investment property deals

---

​Owner/Occupant Deals
While an increase in interest rates generally does not change the current owner’s position in a property (unless they have some type of adjustable rate mortgage), it is important to understand the dynamics at play if considering selling that property.  The bottom line is that a rise in interest rates is going to affect the purchasing power of the buyers interested in making an acquisition.
 
For example, an increase in the interest rate for a Small Business Administration (SBA) loan will affect the loan payment on a $2,000,000 property acquisition as follows*:

• An Interest rate increase from 4.5% to 5.0% can cause the monthly payment to increase from $10,000 to $10,500. 
• Additionally, as interest rates were closer to 4% a year ago, that same payment could have been around $9,500.  

             *Assumptions: 10% down payment, 25-year amortization.
 
Therefore, if interest rates increase as projected, that same buyer who previously could afford a $9,500 payment on a $1,879,981 property ($1,710,000 loan amount @ 4.5%) could now only buy a $1,787,500 property ($1,625,000 loan amount @ 5.0%).  That will clearly affect both buyers and sellers; sellers will have to consider selling at that discount, or buyers will have to look for slightly smaller properties.  

---