Rising Interest Rates and Real Estate: Impacts and Strategies for Investors

Over the last few years, real estate investors have had to adjust to something many hadn’t experienced in a long time: rapidly rising interest rates. What started as gradual tightening turned into one of the fastest rate increases in decades. By 2025–2026, borrowing costs look very different from what investors were used to only a few years ago.

Mortgages are more expensive. Banks have become more cautious. Some property values have softened. And for many investors, the question isn’t whether rates matter — it’s how to operate effectively in this new environment.

At LBC Capital Income Fund, LLC, we see this shift daily from both sides of the table — from borrowers struggling to obtain bank financing and from investors asking where stable yield can be found when traditional markets feel unpredictable.

The reality is that higher rates don’t stop real estate investing. They change the rules of the game. And investors who understand those changes tend to find opportunities that others miss.

How rising rates are affecting real estate

Interest rates touch almost every part of real estate, directly or indirectly. The effects aren’t always obvious at first, but they show up quickly in behavior across the market.

Homebuyer demand

Higher mortgage rates reduce affordability. Buyers who could qualify for a certain price point two years ago now qualify for less. This tends to slow transaction volume and, in some markets, put pressure on asking prices.

For investors, this often means longer listing times for resale properties and more negotiating power when purchasing. While that can feel like a slowdown, it often creates better entry points for patient buyers.

Property pricing and cap rates

In commercial and multifamily real estate, interest rates influence cap rates. As financing becomes more expensive, buyers demand better yields to compensate. That can push cap rates up and property prices down.

For investors looking to acquire assets, this is not necessarily bad news. Lower purchase prices paired with solid rental demand can improve long-term performance, especially if rates eventually stabilize.

Cost of loans

This is where the impact is most obvious. Traditional bank loans now come with higher rates and stricter underwriting. Debt-service coverage ratios become harder to meet. Appraisals become more conservative. Banks simply say “no” more often than they did a few years ago.

This is one of the main reasons private lenders have become more active. At LBC Capital Income Fund, LLC, we’ve seen a noticeable increase in borrowers who previously relied on bank financing but now require private loans to execute projects that still make economic sense.

Strategies to navigate a higher-rate environment

Higher interest rates force investors to be more intentional. The days of easy appreciation and cheap leverage are gone for now. But real estate remains one of the few asset classes where investors can actively adjust strategy rather than passively accept market conditions.

Focus on cash flow and yield

When financing is expensive, appreciation becomes less predictable as a strategy. Cash flow becomes king.

Investors are paying closer attention to rental properties with strong monthly margins and to investments that generate predictable income rather than relying purely on long-term upside.

This is also where interest in private real estate lending has grown. As rates rise, the yields on private loans typically rise as well. Many of the investors we speak with at LBC Capital Income Fund, LLC are intentionally allocating to private lending strategies because they provide income backed by real estate without exposure to daily market swings.

Consider private lending or creative financing

As banks tighten, private lenders often step in to fill the gap. This is especially true for transitional properties, renovation projects, and time-sensitive deals.

Hard money loans, bridge loans, and trust deed investments become more relevant in this environment. For borrowers, they allow deals to move forward. For investors, they create opportunities to earn higher yields by participating on the lending side of the equation.

This dynamic is a big part of why private lending activity has remained strong through 2025–2026.

Lock in rates and manage leverage

Higher rates don’t mean leverage disappears. It means leverage must be used carefully.

Investors are refinancing into fixed-rate loans when possible, reducing overall leverage, and stress-testing deals at higher rate assumptions before committing.

The goal shifts from maximizing leverage to protecting stability.

Seek markets and sectors resilient to rate hikes

Not all real estate reacts the same way to interest rates. Some sectors continue to perform because they are driven by necessity rather than speculation.

Affordable housing, workforce rentals, and markets with strong population growth tend to remain active even when financing costs rise. These are the types of properties many borrowers continue to pursue — and where private lenders continue to provide capital.

Why higher rates don’t eliminate opportunity

It’s easy to assume that high rates simply make real estate harder. In reality, they change who can operate effectively.

Some investors step back. Others become more disciplined. Sellers become more negotiable. Competition thins out. Deals that would have been impossible to win in a low-rate frenzy suddenly become available.

For investors who adjust their expectations and strategies, higher-rate periods often produce some of the best long-term acquisitions.

From our perspective at LBC Capital Income Fund, LLC, this environment has reinforced something important: when banks pull back and rates rise, the role of private lending becomes more essential in keeping real estate activity moving.

A shift toward income-focused strategies

For many accredited investors, this environment has prompted a shift away from relying solely on appreciation or public markets. Interest in asset-backed income strategies — particularly private real estate lending — has grown because rising rates often translate directly into higher yields on private loans.

Instead of paying higher interest, some investors prefer to earn it.

This is one of the reasons we’ve seen increasing interest from investors who want exposure to real estate lending without the operational burden of owning and managing property directly.

Closing thoughts

Rising interest rates have changed the real estate landscape. Financing is more expensive. Banks are more cautious. Deals require more analysis. But none of this stops real estate investing — it simply rewards investors who adapt.

By focusing on cash flow, using leverage carefully, exploring private financing options, and targeting resilient markets, investors can continue to build portfolios even in a higher-rate world.

Markets change. Strategies must change with them. And investors who stay informed and flexible tend to find opportunity where others see only obstacles.

At LBC Capital Income Fund, LLC, we’re watching these trends closely every day — both from the borrower side and the investor side — and it’s clear that while the environment has changed, the opportunity in real estate lending has not disappeared. It has simply evolved. Talk to us by booking a call with fund manager.