An Investor’s Guide to Interest Rates for 2025
A Path to Profitability for the Well-Versed Investor
by Andy Bates
Few factors can have as much impact on investment strategies, and indeed the national economic landscape, as interest rates.
At the onset of 2025, it is crucial for investors to not only understand the basics of interest rates, but also which sociological factors will come to bear, and what strategies investors can employ to maintain and grow their business in the current and anticipated rate environment.
The Inner Workings
An elementary definition of interest rates is that they represent the amount a borrower is charged over time on an allotment of loaned money, also known as principal or funding. The actual rates charged by lending institutions on the principal they provide are determined by a variety of criteria.
Not the least of these is the federal funds rate, which is governed by the Federal Open Market Committee, or FOMC, and impacts many economic conditions including inflation. In times of higher inflation, many institutions tend to raise interest rates which, in turn, can impact consumer demand for borrowing.
The basic expectation is that interest rates and the housing market have an inverse relationship. That is to say that when inflation is up, the housing market tends to slow down. The above is an example of how the Fed can be leveraged to reduce consumer spending, which in turn results in a decrease in the overall cost of goods and thus lowers inflation.
Per one Q4 summary of capital markets in 2024 conducted by U.S. Bank, the Fed is expected to continue to lower interest rates. The assessment concludes that as of late last year the Fed appears to have entered an interest rate decrease-cycle. While this interpretation, based on market data and activity from the FOMC, seems hopeful, it is not the only variable at play which can impact interest rates particularly as a new president of the United States enters office.
The Impact of an Election Year
When governance and policy shape the economy, and can help determine its overall trajectory, then it logically follows that major shifts in governing bodies, such as the election of a new president and all the changes ushered in by the transfer of power, can have significant impact on the overall economy and on interest rates in particular. Will a strong push right, politically, mean more inflationary policies? At the beginning of the term, this remains to be seen.
On the campaign trail, Donald Trump employed particularly strong rhetoric in consideration of tariffs. In a discussion with private lender RCN Capital, economist Rick Sharga, founder and CEO of CJ Patrick Company, comments that severe tariffs on larger import countries like China would likely not be eaten by vendors but rather shunted onto the plates of consumers. Sharga asserts this would subsequently raise the cost of living and could cause a boomerang impact on the inflationary environment.
That environment would spur the Fed to take action to reduce such outcomes. The actions of the Fed in turn would likely result in increased interest rates to hedge against inflation. Sharga also notes that campaign rhetoric and term policies often differ in severity, so it may yet be that cooler heads prevail during this presidential term.
Relevant Investor Strategies
For investors it is not only important to have a finger on the pulse of those factors which can impact interest rates, but also to understand how best to leverage the current environment to the advantage of their business.
Rising interest rates eat into an investor’s return on investment (ROI), making it more difficult for them to achieve adequate cashflow from their properties. The ability to vary one’s revenue strategy may be the key to overcoming this disparity.
As higher interest rates naturally dry up ROI, particularly with short-term investments, one possible strategy is to pursue longer-term investments during periods of higher interest. The aim of this being to focus on improved ROI through investment appreciation, something which is more accessible when assets are held long term.
When working with unfavorable interest rates it can also be beneficial for the investor to consider market areas when scoping out new opportunities. There is very little preventing investors from operating outside of their local municipality. So, it can be worthwhile investigating markets for expected property appreciation, especially during renovative efforts and new construction set to improve the value of homes in the area. In many areas of the country the same property can cash-flow more effectively with a short-term leasing strategy than a longer-term one.
The savvy investor considers all available options for funding. In higher rate environments, traditional financing can have lesser appeal due to regulations surrounding conventional mortgages. In this situation, alternative funding sources such as private lending should be considered. Many private lenders offer financing options which cater well to investors. These lenders might require fewer documents, have greater flexibility in their underwriting and allow for a streamlined process that can be repeated on subsequent investments. Some private lenders provide short-term funding with interest only options or zero prepayment penalties, enabling investors to improve their ROI and investment schedule.
Interest rates can place more properties beyond the means of many investors, but it is worth considering that investors are not the only ones concerned over this conundrum. Sellers too can feel the pressure of rate environments, and uncertainty on the direction of interest rates can inform this even more. With sellers wanting to relinquish properties as soon as possible there is something to be said for wielding interest rates in the investor’s favor. The pressure they supply can be a bargaining chip to bring a seller to the investor asking price.
Into the New Year and Beyond
The real estate industry is bubbling with anticipation. Much remains to be seen regarding the impact of office and policy on the current and future rate environment within the space. Yet real estate investors are far from out of options when it comes to their business strategy. When armed with a solid understanding of interest rates and a knowledgeable outlook on the possibilities of their growth or depreciation there remains a path to profitability for the well-versed investor.
