Grant Cardone is known as an entrepreneur, marketer and motivational speaker, in addition to being the bestselling author of “The 10X Rule.” One of his many business enterprises is managing a large portfolio of multi-family real estate properties through his investment firm, Cardone Capital.
In a recent tweet — or post or whatever we’re calling them on Twitter now — Cardone laid out five reasons higher interest rates can actually be beneficial to investors looking to buy multi-family properties.
GOBankingRates asked Will Matheson, co-founder and managing partner of Matheson Capital — an investment firm specializing in multi-family real estate — to give his expert opinion on Cardone’s claims.
Also see Grant Cardone’s No. 1 way to use passive income to build wealth.
Higher Rates Push Multi-Family Prices Down
Cardone points out that higher interest rates tend to force the price of multi-family real estate down. This is especially true when rates rise quickly. Cardone says falling prices will allow buyers to purchase and achieve a basis that you would never see in a low-rate environment (basis, or cost basis, is the price paid for an asset).
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Matheson rated this claim as true, saying that “the higher cost of debt pushes prices down, allowing for a lower basis.”
Higher Rates Don’t Necessarily Impact Cash Flow
Operating cash flow is a critical factor in real estate investing, especially in multi-family. Cardone’s third point states that higher rates on new purchases should not negatively impact the cash flow when purchased at the right price.
Matheson rated this claim as only somewhat true, saying, “The ‘right price’ is doing a lot of work there. Interest rates are up as much as 500 basis points over the last 18 months. … Cap rates (net operating income of a property divided by price) have not increased as much as interest rates, [so] cash flow is almost certainly being negatively impacted by higher rates.”
Higher Rates Force Some Owners To Sell
Cardone next says that higher rates put pressure on certain types of owners, like short-term buyers, builder-sellers and syndicators (buyers who invest on behalf of multiple investors). These types of investors often don’t plan on owning a property for long. In an environment where prices are already falling, forced sellers entering the market usually drives prices down even further. This would obviously be a benefit to those currently looking to buy.
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Matheson also rated this claim as true, saying, “Many people who bought in 2020 and 2021 will be forced to sell due to higher interest rates.”
Higher Rates Have a Chilling Effect on the Market
Cardone’s next point is that as rates rise, it serves to remove the “frenzy” from the real estate market. The thinking here is that in an extremely low interest rate environment — such as the one in the U.S. that lasted years before the Fed finally started raising rates to fight runaway inflation — there are many more market participants. The low cost of debt means that there is a low barrier to entry. However, in a high rate environment, there is less competition, which often means better rates of return for those who do buy.
Matheson rated this claim as true, agreeing that “a lot of buyers are out of the market.”
You Can Refinance If Rates Come Down
Cardone’s final claim looks to a future where interest rates have fallen. He asserts that when rates come, “and they will,” owners of property bought at a much lower basis than would be typical can now refinance their investment. In certain cases, you can pull money out at time of refinance without tax implications — meaning you can realize at least a partial capital return without having to incur a capital gains tax.
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Matheson rates this final claim as possibly true, noting that there is no guarantee that an owner will be able to refinance. Despite Cardone’s claim, there is also no guarantee that rates will come down — although history indicates that they should eventually, that can take years.
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