Rising Rates, Patient Buyers: How to Invest When Money Gets Expensive

The last nine months have been a sobering experience for anyone who started investing in real estate during the zero-rate years. Mortgage rates have roughly doubled in under a year. Deals that looked like home runs at three percent look like nothing at six percent. Offers that would have been accepted in a bidding war in 2021 now sit quietly on the market. Everything is harder, and the math is less forgiving.

That is the bad news. The good news — and this is genuinely good news if you are a beginning investor — is that rising rates have pushed most of the speculators out of the market and left the disciplined operators behind. The deals are harder to find, but the competition is quieter. The patient, prepared investor has an advantage in this environment that did not exist a year ago.

The first adjustment is mental. Deals do not cash flow at 2021 prices and 2022 rates. You have to negotiate harder on the purchase price, or you have to buy in markets with higher rent-to-price ratios, or you have to put more money down and accept a lower return on the dollars you have deployed. Usually it is some combination of all three. The days of “any deal cash flows” are not coming back any time soon.

The second adjustment is patience. In 2020 and 2021, if you hesitated for a week the property was gone. Today, in most markets, properties sit on the market for weeks or months, and the seller comes to you with a price reduction after thirty days. The investor who waits for the third price drop and then negotiates from there is winning deals the “fast” investor missed by accepting the first number.

Five adjustments to make to your approach in a higher-rate environment:

1. Underwrite to today’s rates, not yesterday’s. If you are running pro formas at 4 percent when the rate you would actually get is 7 percent, you are lying to yourself. The numbers on paper will line up, and the numbers in your bank account will not. Run the deal at the rate you will actually pay. If it does not work there, it does not work.
2. Look for properties that sellers actually need to sell. In a quiet market, not every seller is motivated, but the ones who are genuinely need a buyer. Estate sales, divorces, job relocations, and properties that have sat for more than sixty days are all stronger candidates than a freshly-listed home in a popular neighborhood. Filter for situation, not just for price.
3. Make offers with price reductions built in from the start. Sellers who would have laughed at a 92 percent offer in 2021 will often accept it in 2022. Start there. Negotiate from there. The worst they can do is say no, and in a slow market they rarely do that categorically.
4. Shift more dollars to cash flow and less to appreciation. In a rising-rate environment, appreciation slows or reverses in many markets. Cash flow is what keeps you in the game long enough for rates to eventually come back down. Buy properties that pay you every month, not properties you hope will be worth more next year.
5. Keep dry powder for the second wave of motivated sellers. Most of the real distress in a rate-reset cycle does not appear in the first six months. It appears when the people who over-leveraged in 2021 face their renewal in 2023 or 2024 and cannot refinance at the new rates. Investors who have cash ready for that second wave tend to do very well.

None of this is particularly exciting. Rising-rate markets reward the unglamorous skills — underwriting carefully, waiting patiently, negotiating firmly, saying no more often than yes. The investors who thrive here are not the ones with the flashiest social-media presence. They are the ones who have built a steady process, followed it for years, and stayed on the sidelines when the market asked for stupid decisions.

If you are early in your investing journey and feel behind because you missed the 2020-2021 window, take a deep breath. You did not miss the best moment of your life. You just missed one particular window, and a different one is opening now. The investors who started in 2008, 2009, and 2010 were terrified to buy anything at all. Fifteen years later, those purchases look like the best deals of their generation.

Hard times in the market are the tuition you pay to become a disciplined investor. The discipline you build now compounds for decades. Use this cycle to develop the habits that the easy years would never have taught you, and the next easy cycle — because there will be one — will find you ready.

Expensive money makes cheap discipline valuable.