The Federal Reserve raised rates again last week. Fed Chair Jerome Powel has made it clear that he is willing to do whatever it takes to get inflation under control. Could interest rates rise into the teens? Absolutely.
What does this mean for financing real estate deals? Of course, it means that debt is more expensive, which puts downward pressure on values and upward pressure on rent. But there is a floor on how low valuations can go and a ceiling on how far rents can rise. So as interest rates continue to increase, something else has to give.
Getting creative with the capital stack will make a difference. In a low-interest-rate environment, one wants as much low-cost debt as possible and as little high-cost preferred equity. But as interest rates increase, it makes sense to change the ratio and seek out sources of less expensive preferred equity. An 8% preferred return is still attractive to the average retail investor. The fact that they participate in any upside sweetens the deal.
This is where crowdfunding for real estate deals comes in. With Reg Crowdfunding on a platform like Invown, sponsors can raise up to $5 million in any 12 month period from retail investors (including non-accredited investors).
In an increasing interest rate environment, all sponsors should seriously consider courting this type of capital through a Reg Crowdfunding raise. It can make the cost of capital less expensive and help you close more deals.