Real Estate is one of the most profitable and growth-centric industries worldwide. The Global Market Cap of the real estate industry is expected to reach US $7384.1 billion by the end of 2024. The industry is full of potential for profitable investment and business trading. It is analysed that the residential property market is all set to touch the total market Cap of US $518.90 trillion by 2024.
As per the prediction, the Asia Pacific real estate market is assumed to reach US $2.92 trillion by 2034. The Middle East and Africa real estate market is predicted to experience a CAGR of 6.52% between 2024-2034. However, the applied interest rates and fluctuation in the interest on the mortgaged property play an important role in changing the buying behavior of investors and buyers. Let’s discuss the overall concepts of interest rates on real estate properties.
What Is Interest Rate On Real Estate Properties?
Interest rate is the certain percentage charged by the bank that gives a loan on the mortgaged property during the purchase. The percentage is calculated against the lock-in term to return the borrowed amount. The browser is liable to pay the total amount taken as a loan from the bank, inclusive of the principal amount and the annual interest charged on the borrowed amount. The interest charged by the bank can vary over the period as guided by the RBI. Interest rate affects the buying & investment decisions of buyers based on different situations & market conditions.
How Fluctuation In Interest Rate Affects Real Estate?
The fluctuation in interest rates affects the real estate market directly or indirectly. The rise in interest rates decreases the demand for investment in the real estate market. Buyers and investors change their investment plans and look for other investment opportunities. Many focus areas are affected when there is a fluctuation in the rates of interest on the mortgage property. Let’s discuss those affected factors here;
Effect On ROI (Return On Investment)
An increase in the interest rate on the mortgaged property, especially on the rental property investment, lowers the ROI (Return On Investment). People usually invest in real estate projects for self-accommodation or higher returns. But if they have to pay higher interest rates on property loans, then they don’t see such investments as profitable. They either look for some profitable properties or opt for other investment opportunities.
Affordability
Higher interest rates often raise challenges for people over their buying power and affordability status. Commercial and residential properties with higher interest rates don’t attract investors and buyers. And still, if they invest in certain properties that would be because of the premium market location and higher rental income.
Investment Strategy
Individuals often change their investment strategies against the hike in bank interest rates on the loan for the property purchase. People either search for low-budget properties, popular investment markets, or properties with higher returns on investment.
Mortgage Cost
An increase in the rate of interest against the mortgaged property also increases the monthly EMIs. In some cases, people don’t even stand eligible to get a loan sanctioned from the targeted bank because the interest rates are higher. It becomes difficult for people to pay their monthly EMIs, and return the loan amount with applied interest.
Profitability Factor
Because of the increase in interest rates on the sanctioned loan amount, the ROI gets affected, and so do the profitability margins. Thus, people don’t look to invest in properties against the change.
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Where To Invest When Interest Rates Are Higher?
However, high interest rates on loans from banks for the purchase of any type of real estate property may have a serious impact on the buying decisions of the people. But you can still work out your investment logically and earn higher returns on the investment.
Affordable Projects
Always look for affordable projects to invest in the real estate market. Even if the bank interest rates are higher, you can work out some quality yet affordable & budgeted residential or commercial properties. You can target some semi-urban locations with potential growth.
Commercial & Industrial Properties
When the bank interest rates are higher, you can invest in commercial & industrial properties in the growth-oriented market. Even if the interest rates are up, you still get a better return on investment. You can invest in rental properties, commercial office spaces, industrial lands, and resale properties.
High-Demand Markets
If you are looking for higher ROI and motivating profitability, always invest in high-demand markets. Such markets are hot spots, and the majority of buyers target such areas to buy or invest in different types of properties. It is a great source to earn considerable marginal profit. Even if you invest in the rental amount, you can expect higher rental income.
Value-Added Properties
Some properties are in raw conditions and can be traded for a good amount. Later, with some alterations & renovation, you can resale that property for a better price.
Tips To Follow While Investing In Real Estate During The Increase In Interest Rates
Follow these tips when you want to invest in the real estate sector when the interest rates are higher.
Consider Your Pocket Size
It is recommended to calculate your buying power and know your pocket size before deciding to invest in any type of real estate project. Buying a property under your financial capabilities can make things easier for you, especially when you want to borrow a loan from the bank. All the financial institutions calculate your income through different income sources before sanctioning the final amount.
- Do Some Market Research
Never invest in properties without having any idea about the market, and current bank interest rates. Always do some homework, and do detailed market research to know more about the market.
- Invest In Diversified Projects
Never engage your total budget into a single project. Always diversify your real estate investments to get profits and benefits from one or the other property. Even if interest rates are high, you can earn from the hot spot property or location with higher rental income.
- Work With Industry Professionals
If you are a new investor, or you have less knowledge about the real estate industry, take the help of an industry professional. He will guide you for better investment options, and get higher returns on investment. Expert realtors know exactly how to work out the best real estate products for their investors so that they can earn profits in less duration. Therefore, hiring an expert would be a smarter way to invest in the real estate sector with higher interest rates.
Conclusion
An increase in the rates of interest can affect the buying capacity of buyers and investors. So, even if you are an experienced investor, consider all the precautionary measures into account while planning for the next investment in the real estate market. Higher interest rates can sometimes dominate the market, and cause low market demands. On the other hand, some markets are always hiked and in demand due to unmatched advantages & amenities. Make sure you choose the right market for better returns & profits. Get in touch with a trusted real estate professional for better investment solutions.
