In mid-2022 the Federal Reserve began raising the Federal Funds Rate in response to persistent inflation and held these rates at their highest levels in over 20 years.
The effort to curb spending and lower inflation can present the risk of slower economic growth for investors. This raises an important question: how should you invest when interest rates are high?
We’ll answer this question and a few others in this article.
Why Interest Rates Matter When Investing
Interested rates are used to influence the cost of borrowing money.
When rates are high, borrowing becomes more expensive putting downward pressure on asset prices including stocks, bonds, and real estate. Higher interest rates make interest-bearing investments (such as CDs) more attractive, especially during market turbulence.
For this reason, many investors pull their money out of the stock market and real estate and put it into savings accounts, Treasury bills, or CDs. Is this always the right choice though?
What are the Best Investments When Interest Rates Are High?
For now, the Federal Reserve seems content to keep rates where they are. With interest rates at their highest level in over 20 years, here are some ways you may want to alter your investment strategy:
- Short-term bonds or bond funds: These investments are less sensitive to interest rate changes compared to longer-term bonds which can provide portfolio stability.
- Dividend-paying stocks: Companies that pay consistent dividends can provide a passive income stream, which becomes more valuable as rates rise.
- High-yield savings accounts or CDs: As rates increase, these safe, federally-insured investments will pay out more interest. Some online banks often offer the most competitive yields.
- Real estate: While higher rates increase borrowing costs, certain types of real estate like multifamily properties can perform well. Real estate also acts as a hedge against inflation, which often accompanies rising rates.
Single-family real estate can present a challenge for potential investors when interest rates rise, so next we’ll explore how multifamily real estate can be a solid addition to your portfolio.
Why Multifamily Real Estate is a Smart Investment
Rising interest rates tend to put downward pressure on single-family home values, however multifamily real estate still offers many tangible benefits to investors:
- Multifamily real estate can help diversify your portfolio beyond stocks and bonds. This can provide a hedge against swings in the market and provide a longer-term asset to invest in.
- Higher interest rates negatively affect the single-family housing market, and renting becomes more attractive to people looking for a home. This can help improve occupancy rates for a property and even drive rents up.
- By picking the right markets in high-demand areas of the country you can hedge against economic downturns.
Even in a high-interest rate environment, multifamily real estate still offers excellent benefits to investors. When looking for a multifamily real estate opportunity we recommend the following:
- Rent growth potential: Look for properties in markets with strong job growth, population growth, and limited new supply. These factors support rent growth over time.
- Value-add potential: Properties that need some upgrades often provide the best returns. You can boost rents and property values with cost-effective improvements.
- Holding and exit strategy: A multifamily investment can be held for five years or more. It’s important to select the right firm with a plan for a successful and profitable exit.
- Invest with the right firm: This is especially important in more turbulent times. Select a firm with experience and a strong track record of success in economic boom times and slowdowns as well.