• Sun. Aug 7th, 2022

2 Types of Real Estate Investments That Are Particularly Profitable During Rising Interest Rates

ByWillie M. Evans

May 12, 2022

Since the 2008 recession, the United States has experienced historically low interest rates. Currently, the Federal Reserve (Fed) is raising interest rates to fight inflation. This rise in rates has an impact on all sectors of the American economy, particularly real estate.

Markets have recently fallen and many investors are pessimistic. However, unique opportunities that could include higher yields and undervalued commercial and residential real estate investments are emerging.

Higher rents

Rising interest rates can be particularly profitable for real estate investors, as rents increase during this period. According to a Forbes study, real estate investment trusts (REITs) outperformed the overall market in a rising rate environment from June 2004 to August 2006. REITs returned 60% compared to the S&P 500’s return of 20% during this period.

The rate hike has a silver lining: a recovering economy. The pandemic ends and life returns to normal. Unemployment is at an all-time high and wages have increased by 4.5% in 2021. The economic recovery is one of the reasons for the rise in rents.

Undervalued residential and commercial real estate investments

As rates rise, so does the cost of home financing through a mortgage. Higher mortgage rates reduce demand for residential homes, which in turn lowers prices. As prices fall, scorching housing markets could experience a correction.

Many markets are experiencing increasing demand, leading to bidding wars and homes being sold above the asking price. A correction would make it easier to buy quality properties at a discount. Real estate investors made many deals after the crash of 2008, with house prices recovering by 83% in the 10 years since.

Returns from commercial real estate

Higher rates may also result in higher capitalization or “cap” rates. A cap rate takes the property’s net operating income (NOI) and divides it by the value of the property. A higher capitalization rate means that the investment has a higher risk and a potentially higher return.

Some major components of the cap rate are rents and property values. Higher rents result in a higher NOI. Like residential real estate, commercial real estate valuations generally decline with higher rates as borrowing costs rise, allowing commercial and residential real estate to be invested at substantial discounts.

2 Profitable investments during rising rates

Rising rates can be beneficial for many real estate investments. However, the best real estate investments during this time are those that have high demand and use low fixed rate financing.

Extra space storage EXR

Utah-based REIT Extra space storage EXR acquired $6.19 billion of its $6.26 billion debt before 2022, meaning most of it was funded at low rates.

Combined with rising rents, Extra Space Storage is particularly profitable with a healthy net profit margin of 49.76%. Unlike other REITs, this company is not too large since its debt represents approximately 60% of its total assets.

This REIT is in a unique sub-niche: self-storage. Due to remote working, the pandemic and other factors, the demand for self-storage has skyrocketed. In fact, revenues from this industry are forecast to reach $49.24 billion in 2024, up from $37.33 billion in 2018.

Extra Space Storage is surfing on this trend and has an occupancy rate of 96%. It also benefited from higher rates that rose 22.3% year-over-year to $21.00 per occupied square foot. Higher rents and low-rate locked-in financing make this REIT a potentially attractive play during this time.

Yieldstreet Income Investments

Yieldstreet is a crowdfunding platform that gives accredited and non-accredited investors access to alternative asset classes like commercial real estate, art, and consumer loans.

Yieldstreet Prism Fund: One Yieldstreet opportunity that could be profitable during this time is the Yieldstreet Prism Fund. The Prism Fund focuses on income payouts and has a healthy payout ratio of 8%. It invests in many fields, including art, consumer loans and commercial and residential real estate loans.

It currently has $98 million under management, and investors can buy in for as little as $500. One of its main holdings is consumer loans such as title loans and cash advances. Rising interest rates lead to increased cash flow in this sector.

Investors can access a well-diversified portfolio of income-producing investments that do well during rising rates for a low minimum.

Growth and Income REITs: In addition to the Prism Fund, Yieldstreet has other income-generating investments, such as its growth and non-traded income REIT. This REIT invests in sub-niches such as multi-family, industrial, office, single-family and storage rentals. It primarily focuses on equity real estate investments, but is exposed to debt real estate investments such as mortgages.


Over the past 15 years, the US economy has experienced historically low interest rates, which began in response to the 2008 recession. Fast forward to today, the Fed is beginning to raise interest rates. interest at higher frequencies.

As the markets are down, investors can find many unique opportunities in this environment, especially in real estate. Rising rates can provide investors with higher yields and the ability to purchase commercial and residential real estate at a discount.

Photo by AbsolutVision on Unsplash