Maclennan Investment Group, Inc.

925.385.8798

  • Home
  • Services
    • Commercial Property Management
    • Commercial and Industrial Leasing and Sales
      • Commercial & Industrial Properties for Sale
      • Office, Retail, & Industrial Properties for Lease
    • Individual Investors
    • Note Purchases
  • About
    • Peter Maclennan
    • Book Peter
  • Blog
  • Investments
    • Contra Costa County Duplexes, Triplexes, and Fourplexes
    • Commercial & Industrial Properties for Sale
    • Investment Properties in Central Contra Costa
    • Alameda County Duplex, Triplex, and Fourplex Invesment Properties
    • Office, Retail, & Industrial Properties for Lease
  • Articles
    • Interest Rates and Investment Property Values
    • 5 Mistakes Instant Millionaires Make
  • Contact
    • eNewsletter
  • Note Purchases
  • Commercial Loans
You are here: Home / Articles / Interest Rates and Investment Property Values

Interest Rates and Investment Property Values

The price of investment property and real estate held for investment is closely related to mortgage interest rates and to the bond market. Understanding this interest rate correlation can aid an investor in their decision to buy, sell, or hold an investment property.

Interest Rates and Borrowing

Most investment real estate is leveraged or purchased with debt. The investor will use their own capital along with a loan from a bank, an insurance company, or another investor to purchase the property.

A larger interest rate will increase the monthly payment on a loan. Real estate investors and lenders desire the income from a property to cover the monthly payments. If rents are not increasing at the same rate as interest rates, a property’s value will decrease.

Imagine with me an investment property that provides an investor with $1,000 per month of net operating income after paying expenses. At 4.25% interest on a 30-year fixed mortgage an investor could borrow about $203,000. If the interest rate increases to 5.25%, the borrower could only borrow $181,000.

Interest Rates and Property Values

For simplicity’s sake, we will assume that an investor is going to have a down payment of 25% and will finance 75% of the property’s price. With an interest rate of 4.25% an investor can afford a property worth $271,000 and a mortgage of $203,000. At an interest rate of 5.25% an investor could only afford a property worth $241,000 with a mortgage of $181,000.

The cost of financing has reduced the buying power of the investor. The investor needs a lower price point to afford the same property that produces $1,000 of monthly income.

Arguably, the value of the property must decrease to entice an investor to buy. A 1% increase in mortgage interest rates has the effect of lowering the value by $30,000 an approximate loss of 11%.

Interest Rates, Risk, and Cap Rates

Real estate competes for the investment dollars of rational investors. Investment theories dictate that an intelligent investor will compare like investments depending upon risk and reward. Given the choice to choose a less risky investment for the same return as a riskier investment, a rational investor would choose the less risky investment.

Real estate competes for the investment dollars of rational investors. Real estate is viewed as a riskier investment than bonds and blue-chip stocks. An investor will demand a higher return for the greater risk associated with real estate.

If the return on mortgage backed securities (a type of bond) increases, the resultant return required for an investment in real estate will increase.

This reflection of return is expressed through the capitalization rate (cap rate). The cap rate is calculated by dividing the net operating income of a property by the value or price of a property.

Cap rates and prices are inversely related. As cap rates rise, values decrease. As cap rates fall or decrease, values increase.

When interest rates rise, cap rates rise to compensate for the additional risk associated with being an equity investor in real estate. Rising cap rates decrease a property’s value. When interest rates decrease, cap rates can decrease or compress with the mortgage rate. Decreasing cap rates increase a property’s value.

Putting it All Together

Interest rates are an important part of the value equation in real estate. Rising interest rates will generally result in lower property values over the long run. Low and falling interest rates will generally result in higher property values over the long run.

Real estate investors can use interest rate trends in their investment decisions. Real estate investors wanting to buy a property might do well to wait when interest rates are rising and to pull the trigger quickly when rates are trending down. Real estate sellers would be wise to sell when they see rates trending higher and to wait when interest rates decline.

Head over to Maclennan Investment Group, Inc’s blog for more information on real estate investing. Call Peter today at (925) 385-8798 for a real estate investment consultation.

 

Share the love:

  • Click to share on Facebook (Opens in new window)
  • Click to share on Twitter (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to email a link to a friend (Opens in new window)
  • More
  • Click to share on Pinterest (Opens in new window)
  • Click to print (Opens in new window)

Commercial Real Estate Search

Commercial Real Estate

Top Posts & Pages

  • Boutique Real Estate Investment Group
  • Services
  • Investment Properties in Central Contra Costa

Listings

Warehouse for LeaseFor Lease! Light Industrial Warehouse 511 Wilbur Ave, A7 Antioch, CA 94509View Listing
Large Industrial Buiilding for LeaseFor Lease! Antioch Industrial Building 725 Fulton Shipyard Antioch, CA 94509View Listing

Commercial Real Estate Financing

Commercial Real Estate Financing

Peter Maclennan

Real Estate Broker
CA DRE #01801793
Twitter: @MaclennanInvest
Facebook: Maclennan Investment Group
[More …]

Topics

  • Bay Area Real Estate News
  • Benefits of Real Estate Investing
  • CA Real Estate
  • Commercial Leasing
  • Concord Real Estate
  • Contra Costa Real Estate
  • Industrial Real Estate
  • Investment Property
  • Listing
  • Martinez Real Estate
  • Mrs.' Questions
  • Real Estate Investing
  • Retirement Freedom
  • Seasons Greetings
  • Tenant Representation
  • Walnut Creek

Stay Informed!

Get notified of new listings, emerging trends, and more commercial real estate news.
* = required field

Recent Posts

  • Wishing You a Blessed Christmas & 2023!
  • For Lease! Antioch Industrial Building
  • Six Reasons Commercial Tenant’s Need an Agent…
  • Happy Independence Day!
  • Video Walk-Through of Martinez, CA Office for Lease

Company Profile

Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets.

Learn More about us.
Offering real estate services in the communities of: Walnut Creek, Concord, Pleasant Hill, Martinez, Alamo, Lafayette, and surrounding cities.

Commercial Financing

Commercial Financing
Disclaimer: Information deemed reliable but not guaranteed. This site is not meant to offer legal or tax advice.

Equal Housing Opportunity

Contact Us:

  • Facebook
  • LinkedIn
  • Twitter
  • YouTube

925.385.8798

Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
Licensed Broker in the State of California, DRE#01871809
Equal Housing Opportunity
Find us on Yelp!
Check out Maclennan Investment Group, Inc. on Yelp

Copyright © 2023 · Maclennan Investment Group, Inc.