"Predicting the future is less about seeing the unknown and more about recognizing the familiar echoes of the past."

Rise Capital Investments

Predicting the Future

Now that we as investors have had a few weeks to observe how the recent Federal Reserve rate cuts are beginning to affect residential and commercial real estate markets, we can reflect on potential opportunities and challenges in our specific areas of expertise.

When looking into my real estate "crystal ball," I often think of Mark Twain’s famous saying: “History doesn’t repeat itself, but it often rhymes.”

Predicting the future is a favorite past time for many economists and analysts, despite it being a waste of time. While attempting to time the market is futile, balancing keen observation of patterns without over interpreting is key to help us avoid the worst cycles of the market by focusing on macro versus micro trends. But beware, it may also cause us to miss out on the best opportunities: use history as a guide, not a religion!

With the Fed’s recent rate cuts are stirring echoes from the past, this signals potential buying opportunities for investors who are paying attention.

As rates drop, real estate markets react—sometimes in surprising ways—and that creates unique advantages for a fund like ours.

Historical Context and Current Trends

In the middle of last month, the Federal Reserve began lowering interest rates, marking a significant shift in monetary policy. Historically, it takes about 1.5 to 3.5 years for commercial real estate to rebound after such rate cuts. Looking back at the Great Recession for patterns, we saw sales began to fall in 2007, but after 2.5 years of decline, they started to rise again in 2010.

Fast forward to our current cycle where prices peaked at the end of 2021. If historical patterns hold, we could see an uptick in sales and property valuations by the end of 2025. This suggests we may be approaching the bottom of the market cycle—a point where observant investors can seize excellent buying opportunities.

How Our Fixed-Rate Lending Fund Is Insulated from Rate Cuts

While traditional loans from banks may see their rates drop as the Fed cuts interest rates, the private hard money loans that we provide are not directly tied to federal rate movements, so our rates remain unchanged at 10-12% interest. This creates a unique opportunity for our investors:

As banks lower their rates, our fund continues to provide 10-12% returns on short-term real estate rehab projects on both residential and small commercial properties. While traditional loan rates may fluctuate, our rates remain steady, giving an income advantage. Even in a falling-rate environment, investor returns stay high.

Why Fed Rate Cuts Matter for Real Estate Investors

One way rate cuts don't matter is in the hard money industry as our private lending rates remain unaffected by federal rate cuts. But one way Fed cuts still create ripple effects that benefit the overall real estate market are from lower rates leading to cheaper borrowing for buyers and investors, fueling increased transaction activity in the real estate sector.

1. Reduced Risk from More Favorable Market Sales Conditions

As banks lower their rates and make borrowing at lower monthly payments more attractive, borrowers' properties in our portfolio are more likely to sell at better prices. Lower mortgage rates mean a broader pool of buyers can afford to purchase, which helps improve liquidity and property values. This translates to reduced risk for our loans, as the assets we lend on are more likely to sell quickly and at better prices.

While borrowers struggling to sell a property after renovations are completed mean more payments to us in the short term from extension points and monthly interest, our borrowers' long-term success is more important to ensure repeat business with experienced rehabbers.

Increased demand can help drive property values higher, which benefits our borrowers who are rehabbing and selling properties. As property values rise, our loans carry less risk because the collateral is more likely to sell faster at a higher price. This in turn creates word of mouth referrals through our borrower success, and experienced rehabbers who return to us for more loans.

2. Reduced Risk of Defaults

With lending, we hold no equity in the project meaning we do not share in profits or losses. Our biggest threat is default. When market conditions improve due to favorable selling conditions, borrowers are more likely to successfully complete and sell their projects, reducing the likelihood of missed payments, loan restructures, or defaults. This allows us to maintain our high returns while operating in a safer lending environment. This reduced risk gives more confidence to our pool of private lenders, enabling us to originate and collect on more loans safely.

Our Strategy Moving Forward at Rise Capital Investments

In summary, at Rise Capital Investments, we’ve positioned our fund to capitalize on the advantages created by this dynamic environment. Our hard money loans provide consistent high returns to our investors, even as the broader lending market adjusts to rate cuts. Here’s how we’re moving forward:

1. Maintaining High Returns:

Despite the falling rates in traditional markets, our private loans continue to deliver 10-12% returns. Our investors benefit from the steady, predictable income while enjoying the safety of lending on real estate-backed assets.

2. Reducing Risk Through Improved Market Liquidity:

As market conditions become more favorable for buyers, we anticipate stronger sales for the properties we lend on. This lowers the risk of defaults and strengthens our portfolio, allowing us to continue offering high returns while minimizing risk.

3. Capitalizing on Low Bank Rates to Facilitate Property Sales:

Our borrowers may find it easier to refinance or sell their properties due to lower bank rates, which can lead to faster project completions and quicker loan payoffs. This cycle further reduces risk and allows us to redeploy capital into new opportunities more efficiently.

What This Means for Our Investors: Seizing the Opportunity

For our investors, this means the best of both worlds: higher, stable returns from our private hard money loans, paired with reduced risk thanks to improved market conditions spurred by federal rate cuts. While traditional investors may see their returns diminish with falling bank rates, you’ll continue to benefit from strong, predictable income while taking advantage of a market that is becoming increasingly favorable for sellers.

The Fed’s rate cuts are setting the stage for new opportunities in the real estate market in the near term. Since the partners at Rise are significant investors in each loan we extend, our own skin in the game helps align investor interests with our own priorities to create successful borrowers who reliably repay loans.