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How Do Interest Rates Affect CRE Investing?

Published: 06-28-22 Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Interest rates are one of the most important factors impacting your investments. However, many new investors may not fully understand how or why this is the case.

If you are looking to invest in real estate for a steady return, you need to know the factors that will play a role in how your investment performs over time.

Interest rates are expected to rise in the coming months and years. This is not necessarily a bad thing for markets; it just means that the cost of borrowing money is higher than it used to be.

For investors, this means that they will have to keep costs low and diversify their portfolios in order to protect themselves from rising interest rates.

If you’re thinking about investing your money into commercial real estate, you’ll want to know what implications rising interest rates will have on your decisions.

It’s smart to do your research before making any final decisions; after all, a higher cost of capital won’t make properties any more valuable.

The Basics of Borrowing Money for Investments

To understand how interest rates affect your investments, it’s important to understand how commercial real estate loans work.

When people borrow money to make investments, they are essentially creating a debt. This debt will be repaid with a certain interest rate.

The interest rate is determined by the cost of capital at that particular point in time. A high cost of capital means that it will take more money to repay the commercial real estate loan and pay the lender their interest.

In the event that you fail to pay back the commercial real estate loan, the lender can take possession of the property as collateral.

The lender can also sue you or your business to seek repayment if you default.

Consider this example: If you borrow $500,000 at a rate of 3% for 5 years, you’ll end up paying a total of $575,000.

$75,000 of the total amount that you’ll pay back is interest.

If you’re able to generate much more than $575,000, this can be a very effective strategy. This is why CRE investors often take out commercial real estate loans for projects.

How Commercial Property Loans For Commercial Real Estate Work

A commercial land loan or commercial property loan is a debt you take out to make an investment. When investors need money to buy properties, they turn to banks and other financial lenders in order to secure the money they need.

Some of the advantages of using commercial real estate loans for CRE investments include:

Avoiding using your liquid assets;
Deducting interest payment from taxes;
Reducing your risk level;
Improving your credit score.

Using commercial property loans for CRE investments is an excellent way to add properties to your portfolio and build wealth.

What’s an Interest Rate?

An interest rate is simply a fee the lender charges the borrower for borrowing their money.

This fee is calculated as a percentage of the money borrowed. For example, 2% interest on a $100k loan means you’ll be responsible for paying back the original $100k, plus $2,000 extra on top of that original amount.

Borrowers pay interest on their commercial real estate loans to compensate banks or other financial lenders for risk and opportunity costs.

A lender will charge you a higher interest rate on your commercial land loan if there are higher costs associated with financing the investment.

Lenders use the cost of capital to determine how much they will require in order to receive money in return.

Different Types of CRE Loans

There are different types of loans that banks and other financial lenders offer.

Each commercial real estate loan has its own interest rate and terms.

Some common types of commercial property loans include:

Commercial mortgage-backed security;
Commercial mortgages;
SBA loans;
Bridge loans;
Commercial real estate blanket loan;
Multifamily loans;
Owner-occupied commercial loans;
Hard money loans.

This list highlights some of the commercial property loans available. Try to choose a commercial land or property loan that will fit well with your overall investment plan.

How Do Low Interest Rates Affect Commercial Real Estate?

When interest rates fall, it becomes more affordable for people to borrow money. This leads to a greater amount of borrowing.

Lower interest rates can cause more people to invest and property values to rise as there is more available capital. The lower interest rates help attract more investors, who can bid up prices.

The rising values of real estate help make existing investments more valuable. This is one benefit of having lower interest rates.

Of course, this doesn’t mean that everything will increase in value: It only increases the value of real estate for people who are already invested.

People who invest later will not see the same rise in value.

Lower interest rates also lead to lower payments for people borrowing money.

This can lead to a greater amount of risk-taking and investments in general because people won’t need as much money in order to invest.

How Do High Interest Rates Affect Commercial Real Estate?

When rates are too high, it becomes difficult for people to access capital. This can lead to a decline in the amount of money flowing into the real estate market.

As a result, property values may not rise as quickly, and eventually, they will stagnate or even decrease.

Loans are more expensive when they are at higher rates of interest because banks and other financial lenders have to charge them more in order to make the same amount of profit on their commercial real estate loans over time.