What Does A Fed Rate Hike Mean For Short Term Rentals? Can You Still Make Money Operating An AirBnb Or VRBO?
The Federal Reserve has once again decided to raise interest rates in order to quell the firestorm of inflation. To be honest, we haven’t seen this kind of inflation since the 80’s and I understand why people are a little uneasy about the current recession.
Home prices have skyrocketed over the past couple of years, and that has allowed people to essentially “more” home, for a lot less money.
Now that the interest rates are starting to rise, can you still borrow money to purchase a property to use as a Short Term Rental (STR) and still make money?
You have to understand where you are buying your property, the demand of the area, the state of the property, and ultimately how much it’s going to cost you.
If there’s high demand, you have to have a full awareness of what you’re going to do to make yourself stand out from the competition. What services will you provide? What perks will you include?
Since the pandemic, demand has increased – which means supply has increased. As interest rates increase, however, that means people will have LESS money to spend because it costs more to borrow. The Fed hopes that the raise in rates will either flatten or reduce the inflation rate – thereby giving people more money on the other end.
Either way, there is a tipping point for STRs because demand will flatten while the supply still continues to grow. As such, making yourself stand out in an increasingly competitive market is crucial to keeping your occupancy rate filled, and your bottom line number in the black.
Let’s play devil’s advocate and say that all things are equal. You found a place that is in a desirable area, it’s attractive, and it has all the right amenities for your ideal customer. All you have to do is purchase the property, get the keys, open the door, and let people in…
That means all you have to worry about is the cost of the property.
Breaking Down The Cost Of A Mortgage With The New Fed Interest Rate Hike
For the sake of ease, let’s say you’re borrowing $100,000 to purchase a property. In the height of the pandemic, you could get rates as low as 3% – which means your mortgage payment would have been $422.
Wow! The Fed has really raised interest rates, and banks have obviously adjusted their rates accordingly. We are now seeing 30 year fixed rates starting to hover around 7%. Clearly this is a BIG jump since it’s over double the percentage. Does that mean your mortgage payment will be doubled too?
While your payment will be higher, it does not double. Let’s do the math.
That same $100,000 (at a 7% interest rate) is now going to cost you $672.
The difference in payments is going to be $250. In other words, even if you include your taxes, insurance, and everything else in the payment; your payment is going to be $250 more on a monthly basis.
Can you make up the difference with a SLIGHT increase in your rate? Of course!
Let’s say you have a 90% occupancy rate – that means you are renting your property out 27 days out of the month.
$250 ÷ 27 days = $9.20 per day.
This means that you need to make an extra $9.20 per day in order to keep your current margins as they once would have been at the height of the pandemic. That is VERY possible.
Depending on how much you charge for your STR, you could also make up the difference between the costs by simply renting out your STR for another day or two. With some savvy marketing, and willingness to update your STR, this can also easily be done.
The money is out there, and it’s waiting for you.
My suggestion is to not let the hype over the interest rate hike scare you. During the pandemic, the rates were the lowest they’ve been since World War II. Yes, it was remarkable while it lasted, but the recent hike means that we’re finally back to where we were as recently as 2010. Business was fine then, and still will be today.
Don’t sit and wait for interest rates to come back down, because we will likely never see those World War II/COVID level rates again. Those rates were due to extraordinary circumstances and our market is now suffering because of it.
If you sit and wait, you’ll never invest.
Yes, interest rates are increasing. But, don’t let that discourage you from finding a good deal and growing your empire. Your STR will succeed as long as you make up the difference in creative ways, or you simply operate it as is.
As you have seen, it’s only a $250 difference in monthly cost, which is $3000 for the year. It might be a small hit to the bottom line, but your overall value and worth will increase with each piece of property you own.
That’s how you build long term wealth.
To learn more about navigating real estate investing and the ever-changing market…
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