Everyone in real estate is waiting to see if the Fed will lower the Federal Funds Rate (FFR) at the September 2024 meeting of the Federal Reserve Board. If the FFR is lowered at the September meeting, this will lead to a lower rate environment to end out the year. In fact, rates have already dipped in the past few weeks with only a “rumor” that the Fed may lower the FFR at the September meeting.
If you believe that the Fed will lower the FFR at the next meeting in September, what can you do as a real estate investor to prepare for, and take advantage of, lower rates in Q4?
Opportunities in Distressed Properties with Lower Interest Rates
- Right now at the higher cap rates, there are a lot of multifamily, apartment deals that no longer make sense. They paid too much for properties when rates were historically low a few years ago, at prices that only made sense when rates were 3%.
- Look for multifamily properties where property owners can’t refinance at the higher rates and their short term loans are past due. Negotiate short sales with the lenders and purchase the properties at a discount using hard money. Then if rates go down, refinance at a lower rate because then the deals make sense again at the lower rates!
- Look for homeowners that need to tap their home’s equity quickly to solve a problem, or homeowners with a need to relocate quickly who don’t have cash to move. Sometimes a quick sale using a hard money loan to purchase a property from a seller can solve a lot of problems for a homeowner.
- Bottom line: If the Federal Funds Rate does go down in Q4, you can refinance the properties out of the hard money loans you used to purchase them at a much lower rate.
New Construction Projects: A Strategy for Lower Rate Environments
- Focus on projects such as affordable housing, multifamily projects with 1-4 units, and other areas where you see a growing demand in the market with low supply.
- Use a hard money construction loan to build the property and then either position it for resale in a lower rate environment, or hold it and refinance out your hard money loan in a lower rate environment.
- If you plan to position the property for resale upon completion of construction, rates will be lower and your buyers will have an easier time qualifying for a loan to buy your property.
- If the project is a build and hold property, use a hard money construction loan to construct the property and then refinance at a much lower rate once it’s completed.
- Bottom line: If the Federal Funds Rate does go down in Q4, you can refinance a new construction property, or resell it, much easier in a lower rate environment.
Finishing Fix and Flip Projects to Benefit from Lower Rates
- If you have a fix and flip project underway that won’t be completed until after the kids go back to school in August, get it completed by the end of September 2024 at the latest. This way you can take advantage of a potential surge in buying activity that may occur in Q4 in response to a lower rate environment.
Using Seller Financing to Buy Rental Properties When Rates Drop
- Many sellers of properties have loans under 3%. Even if interest rates do go down in Q4, they won’t go down enough to match the historically low interest rates that many sellers have on their properties. Try to find sellers that are willing to do seller financing.
- There are motivated sellers out there with properties that have been sitting on the market for a while so it doesn’t hurt to see if some of these sellers will offer seller financing. If not, use hard money loans to purchase the properties for all cash. Promising a quick close in under a week, using cash and a hard money loan, can usually get the price tag reduced significantly!
- Bottom line: If the Federal Funds Rate does go down in Q4, you can refinance the properties out of the hard money loans you used to purchase them at a much lower rate. And please note, make sure to check the legality of what you’re doing before you do it on seller financing deals.
- Many loans prohibit the sale of a property, such as is implied above, so make sure you read the seller’s loan documents very carefully if you plan to do seller financing with a seller that has a loan in place.
- Also some states are cracking down on seller financing now, so check the lending and real estate laws in the state where your property is located to make sure you’re complying with all regulations and disclosure requirements that may be required.
Real estate investors are all watching carefully to see if the Fed will lower the Federal Funds Rate at the September Federal Reserve Meeting. If rates do go down in Q4, how can real estate investors prepare to capitalize on this? Carefully weigh your bet, as it’s anyone’s guess what rates will do for the rest of 2024. And remember, none of this content is intended to be investment advice, this is an opinion piece, so take it all with a grain of salt.
But if you are going to do something this year, you’ll probably need funding for any of the above types of deals, am I right? And that’s what I specialize in so reach out to me for a consultation on how to structure the funding needed for your deals. Not sure if a private money loan is right for your situation? I can help answer that question too, so reach out to me, or call 435-565-1768.
Written by: Corey Dutton, MBA, PLM