--- title: "Busting Myths: The Connection Between Real Estate and Interest Rates" description: The federal funds rate is what the Federal Reserve charges its member banks to borrow money. image: https://www.realized1031.com/hubfs/Images/photo/abstract/interest-rate-blocks-optimized-is1140137817.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Busting Myths: The Connection Between Real Estate and Interest Rates Posted May 21, 2019 ![interest-rate-blocks-optimized-is1140137817](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/interest-rate-blocks-optimized-is1140137817.jpg?width=650&name=interest-rate-blocks-optimized-is1140137817.jpg) As of December 2018, The Federal Reserve Open Market Committee (FOMC) had bumped up the federal funds rate for five consecutive quarters. Although Federal Reserve Chairman Jerome Powell signaled a slow down of increasing rates in the committee’s meeting in January 2019, there is still optimism that the U.S. economy will grow in the near future amongst FOMC members, meaning the possibility of further increases in the future.1 The federal funds rate is what the Federal Reserve charges its member banks to borrow money. And, that rate can impact everything from bond and Treasury bill rates of return, to mortgage rates. As such, it seems as though whenever the Fed makes some kind of move on the federal funds rate, one question asked is how that action will impact the real estate sector. The immediate answer could be: “A lot.” A higher interest rate could mean borrowing money becomes more expensive. This, in turn, could mean real estate will cost more. Higher interest rates could impact rates of return on a real estate investment, as it could lead to higher capitalization (cap) rates, weaken the value of property and hurt investment performance. Cap rates are determined by net operating income and asset value; the higher the cap rate, the lower the property value. Though the above could represent a doomsday scenario, the truth is that an interest rate is only one variable impacting real estate investments.   ### Busting Myths Let’s take a look at the following myths and realities of interest rates: **1) Myth:** Higher interest rates will mean lower returns; increasing interest rates will decrease the value of future cash flows. **Reality:** Many variables determine cash flow values, not just interest rates. Expenses, from increasing property taxes to property management fees, can impact your cash flow. Geographic location can, also. Your property’s age can also be a determining factor because of increased costs due to capital improvements. Interest rates are not the sole factor. **2) Myth:** Increasing interest rates mean investors will demand a higher rate of return. This, in turn, could lead to a lowering of the value of property, making real estate investments potentially less attractive. **Reality:** Again, other issues -- primarily economic – can impact your asset’s value, not just an interest rate boost. For example, inflation could increase the value of your asset, wiping away any potential decline from an interest rate boost. **3) Myth:** Higher interest rates will lead to a higher cost of borrowing, meaning fewer will be able to obtain mortgages to buy real estate. **Reality:** Let’s keep in mind that the Fed doesn’t increase its discount rate without reason. More often than not, the rate is increased in an attempt to control inflation and/or because the economy is on sound footing. Furthermore, loan interest rates may be floating and dependent on certain indices unrelated to the discount rate set by the Federal Reserve: - The London Interbank Offered Rate, or LIBOR. This is the average interest rate at which major international banks borrow from one another. LIBOR is common among adjustable-rate mortgages and business loans, as well as financial tools traded on the global financial markets. - The Cost of Savings Index, or COSI. COSI is a bank-specific index, representing that bank’s certificate of deposit account interest rates, versus the Fed’s discount rate. The COSI, is, however, available in only certain banks. **4) Myth:** A higher interest rate will automatically mean a higher cap rate. And a higher cap rate will erode a property’s value. **Reality:** A higher cap rate could mean a drop in the asset’s value. But interest rates and cap rates don’t move in lock step. Rather, cap rates can be influenced by issues such as local market trends, capital flow, real estate fundamentals and investor risk appetite.   ### Do Not Panic The takeaways from this discussion are that, first of all, higher Fed discount rates may be in our future. The Federal Reserve likes the economy’s improvement, and will continue to moderately increase that discount rate. But second, relying solely on discount rate increases to predict what will happen to the real estate sector represents narrow thinking. The relationship between interest rates and real estate is fairly complex. As a result, the rise and fall of the discount rate is only one issue to consider when determining the best type of investment for your portfolio.   *Realized 1031 offers intelligent insight, options and advice about real estate investments, no matter how the Federal Reserve is handling the discount rate. For more information on if – and how – discount rates can impact your holdings, contact Realized 1031.*   1. Paris Ward. Why did the Fed halt interest rate hikes? Now we have more insight. Credit Karma. April 17, 2019. Learn Ways To Help Build Long-Term Real Estate Wealth [![Get Tips For Managing Real Estate Wealth](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-eBook-250c.jpg?width=250&height=250&name=IPWM-eBook-250c.jpg "Learn new ways to use real ...") ](https://www.realized1031.com/blog/busting-myths-the-connection-between-real-estate-and-interest-rates#blogform) Download eBook ---   --- ### Get Tips For Managing Real Estate Wealth ![Learn Ways To Help Build Long-Term Real Estate Wealth](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-eBook-550.jpg?width=550&height=650&name=IPWM-eBook-550.jpg) Learn new ways to use real estate to pursue your wealth goals. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "As of December 2018, The Federal Reserve Open Market Committee (FOMC) had bumped up the federal funds rate for five consecutive quarters. Although Federal Reserve Chairman Jerome Powell signaled a slow down of increasing rates in the committee’s meeting in January 2019, there is still optimism that the U.S. economy will grow in the near future amongst FOMC members, meaning the possibility of further increases in the future.1 The federal funds rate is what the Federal Reserve charges its member banks to borrow money. And, that rate can impact everything from bond and Treasury bill rates of return, to mortgage rates. As such, it seems as though whenever the Fed makes some kind of move on the federal funds rate, one question asked is how that action will impact the real estate sector. The immediate answer could be: “A lot.” A higher interest rate could mean borrowing money becomes more expensive. This, in turn, could mean real estate will cost more. Higher interest rates could impact rates of return on a real estate investment, as it could lead to higher capitalization (cap) rates, weaken the value of property and hurt investment performance. Cap rates are determined by net operating income and asset value; the higher the cap rate, the lower the property value. Though the above could represent a doomsday scenario, the truth is that an interest rate is only one variable impacting real estate investments. Busting Myths Let’s take a look at the following myths and realities of interest rates: 1) Myth: Higher interest rates will mean lower returns; increasing interest rates will decrease the value of future cash flows. Reality: Many variables determine cash flow values, not just interest rates. Expenses, from increasing property taxes to property management fees, can impact your cash flow. Geographic location can, also. Your property’s age can also be a determining factor because of increased costs due to capital improvements. Interest rates are not the sole factor. 2) Myth: Increasing interest rates mean investors will demand a higher rate of return. This, in turn, could lead to a lowering of the value of property, making real estate investments potentially less attractive. Reality: Again, other issues -- primarily economic – can impact your asset’s value, not just an interest rate boost. For example, inflation could increase the value of your asset, wiping away any potential decline from an interest rate boost. 3) Myth: Higher interest rates will lead to a higher cost of borrowing, meaning fewer will be able to obtain mortgages to buy real estate. Reality: Let’s keep in mind that the Fed doesn’t increase its discount rate without reason. More often than not, the rate is increased in an attempt to control inflation and/or because the economy is on sound footing. Furthermore, loan interest rates may be floating and dependent on certain indices unrelated to the discount rate set by the Federal Reserve: The London Interbank Offered Rate, or LIBOR. This is the average interest rate at which major international banks borrow from one another. LIBOR is common among adjustable-rate mortgages and business loans, as well as financial tools traded on the global financial markets. The Cost of Savings Index, or COSI. COSI is a bank-specific index, representing that bank’s certificate of deposit account interest rates, versus the Fed’s discount rate. The COSI, is, however, available in only certain banks. 4) Myth: A higher interest rate will automatically mean a higher cap rate. And a higher cap rate will erode a property’s value. Reality: A higher cap rate could mean a drop in the asset’s value. But interest rates and cap rates don’t move in lock step. Rather, cap rates can be influenced by issues such as local market trends, capital flow, real estate fundamentals and investor risk appetite. Do Not Panic The takeaways from this discussion are that, first of all, higher Fed discount rates may be in our future. The Federal Reserve likes the economy’s improvement, and will continue to moderately increase that discount rate. But second, relying solely on discount rate increases to predict what will happen to the real estate sector represents narrow thinking. The relationship between interest rates and real estate is fairly complex. As a result, the rise and fall of the discount rate is only one issue to consider when determining the best type of investment for your portfolio. Realized 1031 offers intelligent insight, options and advice about real estate investments, no matter how the Federal Reserve is handling the discount rate. For more information on if – and how – discount rates can impact your holdings, contact Realized 1031. Paris Ward. Why did the Fed halt interest rate hikes? Now we have more insight. Credit Karma. April 17, 2019.", "articleSection" : [ "Real Estate Investing" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2020-12-02T21:36:29+0000", "datePublished" : "2020-12-02T21:36:29+0000", "description" : "The federal funds rate is what the Federal Reserve charges its member banks to borrow money. \n\n", "headline" : "Busting Myths: The Connection Between Real Estate and Interest Rates", "image" : { "@type" : "ImageObject", "height" : 366, "url" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/interest-rate-blocks-optimized-is1140137817.jpg", "width" : 650 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/busting-myths-the-connection-between-real-estate-and-interest-rates", "name" : "Busting Myths: The Connection Between Real Estate and Interest Rates", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/interest-rate-blocks-optimized-is1140137817.jpg" } ```