Interest rates are high. Now what?
The average home loan interest rate is 7.8%, according to Bankrate. A year ago, it was at 6.75%. High rates have definitely affected our business, and I wanted to share some ways we are adapting.
Pulling Out Equity
We are locked into multiple 4-5% interest rates at properties with equity. To tap into this equity and have cash for potential deals, we are pursuing business lines of credit (LOC)backed by real estate. If you’re interested in doing the same, I highly recommend using that phrase because banks acted like I was crazy when I said investment property Home Equity Line of Credit (HELOCs).
While LOC rates are still high, you aren’t charged unless you use the funds. You will have to cover closing costs. I’ll explore these more in my next post.
Reducing Expenses
Reducing our expenses puts us in a better situation if our vacancy increases and allows us to save more to take advantage of potential opportunities. Here are some examples of how we are cutting back going into 2024:
Cutting all non-profitable business projects (Google ads, social media, etc.)
Budgeting for 90% AirBnB revenue (our AirBnB funds the rest of our business, so this dictates what we can spend on other areas of the business)
Conservative pricing by prioritizing occupancy over potential earnings.
Eliminating all automatic renewal subscriptions
Conservative Underwriting
High interest rates are affecting different sectors of the economy at different rates. With deals getting tougher and more challenging to find, you will want to “help” deals by assuming renovations will be less or rent will be higher. Don’t. Here’s how we adjusted our underwriting:
Assuming 8.5% refinance interest rates (we are currently getting 7.3-7.7% rates)
Assuming 125% rehab costs
Assuming +3 months for rehab times
Assuming 80% ARV for resale and refinances
Assuming 125% for insurance costs
Assuming no annual rent increases
Smart Time Management
The market is constantly changing, and rarely is it changing for the better. You can mitigate your risk by reducing your “exposure time” and sprinting towards stabilization/exit. Underwriting is full of assumptions; the longer your project takes, the more likely those assumptions will change. Here are some examples of smart time management:
Flipping: have your contractor ready to go once you close. Consider substituting long lead time items with in-stock materials. Get listing photos ASAP instead of waiting until everything is done and perfect.
Long-Term Holds: have your listing ready to go live as soon as you close. Make cosmetic repairs before closing if possible. Consider offering rent concessions to scoop up eager tenants.
Short-Term Rentals: (this seems risky in this environment) Make sure you can take advantage of your local hot season. Have your furnishing theme set and furniture set to go once you close.
Summary
Turning our equity into cash through a HELOC or Business Line of Credit.
Cutting back on expenses to reduce risk and increase our reserves.
Tightening our underwriting to better prepare for the market’s unknowns.
Reducing our risk by executing projects quickly.
