How Rising Interest Rates Impact Multifamily Investing and Can You Still Make Money?

Over the past few years, interest rates have fluctuated significantly, and for multifamily investors, these changes can have a profound impact on profitability, financing, and overall investment strategy. Whether you’re looking to acquire new properties, refinance existing assets, or manage operational costs, understanding how rising interest rates influence the multifamily real estate market is crucial.

1. Higher Borrowing Costs

One of the most immediate effects of rising interest rates is an increase in borrowing costs. Multifamily investors typically rely on financing to acquire properties, and when interest rates rise, so do mortgage payments. This can lead to:

• Higher monthly debt service costs, reducing net cash flow.

• Lower leverage options, as lenders may offer lower loan-to-value (LTV) ratios.

• Increased difficulty in meeting debt-service coverage ratios (DSCR), making it harder to secure financing.

2. Impact on Property Valuations

As borrowing costs rise, property values can be affected. Higher interest rates generally lead to higher capitalization rates (cap rates), which can drive down property valuations. Sellers may have to adjust their expectations, and buyers need to be more diligent in underwriting deals to ensure they still achieve desired returns.

3. Slower Deal Flow & Market Adjustments

When interest rates rise, there is often a slowdown in transaction volume as both buyers and sellers adjust to new financial realities. Investors who were relying on aggressive financing may put acquisitions on hold, while sellers may be reluctant to lower prices. This can create a period of market stagnation until equilibrium is reached.

4. Refinancing Challenges

Investors looking to refinance their properties may face challenges if they originally secured loans at lower interest rates. Refinancing into a higher rate environment can:

• Increase monthly payments, reducing cash flow.

• Make it harder to pull out equity, limiting reinvestment opportunities.

• Force owners to hold properties longer to avoid unfavorable loan terms.

5. Minimizing Costs & Adjusting Investment Strategies

One of the most effective ways to maintain profitability in a high-interest rate environment is by minimizing property management costs. Investors should focus on streamlining operations by leveraging technology, negotiating better service contracts, and improving tenant retention to reduce turnover costs. Cost-effective property management strategies that we implement to offer the lowest monthly cost include:

• Implementing smart technology, such as automated rent collection and maintenance request systems, to improve efficiency.

• Reducing vacancy rates by offering incentives for lease renewals and enhancing tenant satisfaction.

• Regular maintenance planning to prevent costly emergency repairs and prolong the lifespan of critical systems.

6. Can You Still Make Money in a High-Interest Rate Environment?

Despite rising interest rates, multifamily investing can still be profitable with the right approach. Investors should prioritize:

• Cash flow-positive properties, ensuring rental income covers all expenses, including debt service.

• Long-term value appreciation, focusing on locations with strong demand and economic growth.

• Creative financing options, such as assumable loans, seller financing, or partnerships to lower upfront capital costs.

• Operational efficiency, optimizing property management and reducing expenses to maintain healthy margins.

While interest rate hikes pose challenges, investors who refine their strategies and focus on sound financial management can continue to see strong returns in the multifamily market.

Despite these challenges, rising interest rates do not mean multifamily investing is no longer viable. Investors can adapt by:

• Exploring alternative financing options, such as seller financing or assumable loans.

• Focusing on value-add opportunities, where improvements can justify higher rents and offset increased borrowing costs.

• Prioritizing properties with strong cash flow, rather than those relying solely on appreciation.

Conclusion

While rising interest rates create hurdles for multifamily investors, they also present opportunities for those who are well-prepared. By adjusting underwriting criteria, seeking creative financing solutions, and focusing on properties with strong fundamentals, investors can navigate this changing landscape successfully. As the Chicago market continues to evolve, staying informed and adaptable will be key to long-term success.