This week, the Federal Reserve Committee issued a FOMC statement that announced their decision to lower the target range for the federal funds rate by 0.5%, bringing the new target range to 4.75%- 5.00%. This move could significantly impact the overall economy, but for real estate investors (REIs), this could present new opportunities for profitability. Whether you prefer long-term buy-and-hold properties or focus on the fast-paced style of fix-and-flip investments, this rate change could immediately affect your business.
“When the Fed lowers rates, it often leads to a decrease in mortgage rates. Lower mortgage rates tend to stimulate increased activity among real estate investors. For flippers and developers, reduced rates can boost demand from end-buyers. Rental property investors also stand to benefit, as the lower cost of debt can enhance their overall returns,” said Charles Goodwin, Vice President of Sales at Kiavi.
Understanding the potential effects on the real estate market becomes crucial to remaining ahead of the competition and maximizing cashflow. REIs must prepare to navigate sporadic changes and capitalize on potential opportunities immediately.
Real estate investors have faced multiple challenges navigating the market in recent years. Many homeowners have held off from listing their properties, clinging to their low pre-pandemic loan rates. With interest rates previously holding around 7%, property owners haven’t been eager to sell and take on new loans at double the interest rate. This hesitation has kept inventory tight and reduced acquisitions for some fix-and-flip and long-term rental investors.
However, the market may quickly shift with the recent Fed rate reduction. As borrowing rates decrease, more homeowners may finally feel comfortable listing their properties, leading to an increase in inventory. With a broader range of properties available, REIs could have a chance to refine investment strategies, secure better deals, and potentially expand investment portfolios.
Unsurprisingly, affordability has always been a significant issue for developers and real estate investors alike. Higher interest rates and soaring property prices temporarily pushed many would-be REIs out of the game.
“Entry-level homebuyers account for the vast majority (52%) of flipped home sales, many of which were priced out of the market when rates peaked. With mortgage rates forecasted to trend lower in 2024 and potentially 2025, this important segment to flippers is expected to return to the market and create demand for move-in ready properties.” shared Arvind Mohan, CEO of Kiavi.
The heightened demand for properties presents equal opportunities and challenges. With more entry-level buyers returning to the market, competition for properties will likely increase. This increase in demand could drive up acquisition costs and tighten REI profit margins.
On the other hand, this increase in demand could also create opportunities to flip properties faster and at higher prices. With shorter holding periods, real estate investors may be able to finally capitalize on new demand and turn over their properties quickly, allowing for increased profits despite the more competitive landscape. Speed and adaptability will be vital in taking advantage of these potential market changes.
With the Federal Reserve cutting the federal funds rate by 0.50%, borrowing costs for real estate investors could drop significantly. As rates decrease, the rental market may also see notable shifts. Lower rates could mean cheaper financing options, improving REI cash flow by reducing debt servicing costs. This increased cash flow would allow REIs to reinvest in property improvements, expand their long-term rental portfolios, and improve overall profitability.
More renters may also decide to shift toward homeownership, reducing the overall pool of renters. This shift could lead to a higher vacancy rate for rentals and increase rental competition between landlords. Real estate investors will need to navigate these changes to manage returns carefully.
On the positive side, lower borrowing costs could present a unique opportunity for portfolio growth. Investors could acquire additional long-term rental properties at more affordable financing rates, allowing them to leverage their capital more efficiently. Lower interest rates make refinancing existing properties attractive to REIs and could raise additional equity to reinvest in other ventures or improve REI cash flow. This flexibility positions real estate investors to act quickly on new opportunities, enabling them to expand their property portfolios and strengthen their overall investment strategy to align with a more favorable investment environment.
As with any shift in the real estate market, REI success may come down to how well you adapt to the changes and how quickly you can react. With over $18 billion in loans funded, Kiavi offers a wide range of flexible, fast, and easy loan options that cater to just about any real estate investment strategy you desire. Whether you’re interested in fix-and-flip, long-term investments, or scaling your portfolio, choose Kiavi as your financing partner.
Stay ready, stay informed, and capitalize on the opportunities these rate cuts may bring. Get prequalified by Kiavi today.