Federal Reserve Chairman Tells Congress
Federal Reserve Chairman Jerome Powell was clear in his testimony to Congress that the central bank is very likely to cut interest rates in July. He emphasized that the Fed was prepared to act to offset a potential declining economic outlook due to trade tension coupled with a weaker global economy.
Adding to this expectation, Federal Reserve Bank of Chicago President Charles Evans said lower U.S. interest rates are needed to combat weak inflation. As voting member of the Fed’s rate-setting committee, he anticipates two reductions in the central bank’s benchmark federal-funds rate in 2019. The intent is to lift inflation above its 2% target.
Another member of the rate-setting committee said to expect a bump of 50 basis points by year-end.
Possible Effects for Residential Rental Landlords
Cuts in the fed-fund rate may result in lower costs of borrowing. So, this may surface an advantage for residential rental investors to refinance at a lower rate and/or refinance a current adjustable rate mortgage to a fixed rate loan. Additionally, as we’ll see below, it may spike an increase in potential investors seeking deals which may be a motivation to consider selling an investment property.
Likewise, potential investors may enjoy the opportunity to leverage investments in rental properties with reduced borrowing costs between now and year-end.
Interest rates have a profound effect on the value of income-producing real estate and an individual's ability to purchase residential properties (by increasing or decreasing the cost of mortgage capital). While supply and demand of properties in a given area have a significant effect on prices, government-influenced Interest rates drive property-level costs and thus impacts values.
Residential rental investors typically employ a two-step process to determine the investment value of a property. The steps are as follows:
- Forecast the anticipated rental income
- Subtract all costs … including debt, maintenance, replacements, etc.
That will determine the cash flow after all operating expenses and is the basis for the property value.
So, the dynamics of supply and demand are greatly influenced by the cost of borrowing. In turn, the cost of borrowing is directly impacted by the fed-fund rate. Reduced rates will often increase the availability of capital and thereby attract more potential investors seeking deals.
Notably, the foregoing underscores the validity of the KRS Holdings residential investors success equation.
Successful property management is based on simple math:
Add value to your assets, subtract unnecessary expenses.