The recent jump in mortgage rates has made cash flow tight for real-estate investors. As a result, they are pivoting and exploring different types of loans to sustain their business. In addition, investors are strategically buying properties near certain buildings and businesses to maximize their rental income.
Suzanne Luther: Jump in Mortgage Rates Tightens Cash Flow
Suzanne Luther, a loan manager and founder of FasterFunds Lending in St. Louis, Missouri, highlights the significant impact of the rising mortgage rates on the cash flow of real-estate investors. With the 30-year fixed mortgage rate now at 7.07% and the refinance rate at 7.16%, investors are finding it increasingly difficult to sustain their real estate portfolios. The higher rates are affecting the cash flow perspective, and even though rents have also increased, they are not increasing enough to compensate for the rate hike.
Investors Seek Alternative Loans as Mortgage Rates Continue to Rise
To tackle the cash flow challenge caused by the increase in mortgage rates, investors are exploring alternative loan options. One trend that has emerged is the growing interest in midterm rentals, which offer higher cash flow compared to traditional long-term leases. These rentals are particularly attractive in populated areas near hospitals, where traveling professionals, such as nurses, seek accommodation. By targeting these areas, investors can secure higher rents while avoiding the constant turnover associated with short-term rentals.
Strategic Real Estate Investing: Buying Near Hospitals and Businesses
Investors are strategically buying properties near certain buildings and businesses to leverage their rental income potential. Buildings located near hospitals, in particular, have become popular choices as they attract traveling nurses who are willing to pay higher rents. Suzanne Luther cites examples of clients who have purchased single-family houses near hospitals in St. Louis, Missouri, rehabbed them, and listed them on platforms like Furnished Finder. The demand for such properties remains steady as nurses often recommend them to their colleagues.
Midterm Rentals Gaining Popularity as Short-Term Demand Slows
The decline in demand for short-term rentals, such as Airbnb, has led to an increasing interest in midterm rentals. These rentals, which extend beyond two weeks or 30 days, offer better cash flow compared to long-term leases while being easier to manage. Traveling professionals, like nurses, are a reliable target market for midterm rentals. This shift in investment strategy allows investors to maintain a higher rental income without the challenges posed by short-term rental turnovers.
Hedge Funds Enter Real Estate Market, Offering Long-Term Financing
Another trend emerging among real-estate investors is the involvement of hedge funds in the market. Wall Street money is coming together to offer long-term financing for rentals, providing investors with more options outside of traditional banks. These loans, known as Debt-Service Coverage Ratio mortgages (DSCR loans), are secured against investment properties with cash flow. They offer advantages such as lower entry barriers, as they do not require tax returns, and the ability to secure loans under an LLC instead of personal names. While the rates may not be significantly lower than traditional bank rates, the competition among different firms allows investors to shop around for the best options.
As mortgage rates continue to rise, real-estate investors are finding it challenging to maintain cash flow. However, they are adapting to the changing market conditions by exploring alternatives such as midterm rentals and seeking financing from hedge funds. By strategically targeting areas near hospitals and businesses, investors can maximize their rental income potential. While the current market poses challenges, investors can still find opportunities by exploring different loan options and carefully considering their investment strategies.
Analyst comment
Overall, this news can be evaluated as neutral. The rise in mortgage rates is negatively impacting the cash flow of real-estate investors, but they are adapting by exploring alternative loans and targeting properties near hospitals and businesses. The market will likely see a shift towards midterm rentals and increased involvement of hedge funds in real estate financing. Investors will need to carefully consider their investment strategies and explore different loan options to maintain cash flow in the changing market conditions.
