Why Rental Properties Are Still a Good Investment When Interest Rates Rise
The U.S. sets itself apart from other countries by offering a great advantage to real estate investors through 30-year fixed-rate mortgages. This isn’t commonly provided where other countries tend to present mortgages that have adjustable, variable, flexible, or renegotiable rates.
Understandably, the risk factor in these mortgage offers tends to be high when the interest rate suddenly skyrockets while owning the property.
Fixed-rate mortgages let rental property investors avoid future interest rate hikes although there are times when the mortgage interest rates are attractively low, such that being a borrower does not go through unnecessary stress.
While the above scenario is great, we can’t expect it to last. We must also deal with the other side of the situation, where interest rates soar to great heights. When this occurs, it can impact the returns we get from our property investment.
If you’re trying to grow your portfolio, you might decide to reduce your investment plans. You might also wonder if there’s a way to offset the high mortgage interest rates to benefit from your rental property earnings.
At this point, it’s vital to dig deep and learn the mechanics of how rental properties stay profitable, and what actions you can take for your business. You would also want to learn what characteristics a property should carry so you will continue to make money, even when you’re facing higher mortgage interest payouts.
Consider Rental Properties as Long-Term Investments
There are expectations built around rental properties as a way to make a quick profit. However, it is worth investing in property over the stock market in order to make a long-term investment. Some people look for fixer-uppers that cost less and then renovate them, while others buy properties during economic downturns to gain real estate assets at discounted prices.
However, keep in mind that rental properties are categorized as long-term investments and you should calculate the profit over the long-term. Focusing on the short-term projections can lead you to believe real estate investing is not worth it, whereas long-term projections tell a different story.
Eventually, properties appreciate and rental demand can soar. This can affect your rental pricing, which leads to potentially higher returns in the future.
How Rentals Produce Cash Flow
Rental properties make money through
- Cash flow
- Tax benefits
- Equity from mortgage down payments
- Hedging against inflation
While some of the ways cited above are riskier than others, you can focus on two vital elements.
Balance the Profit Sources
If you can’t rely on getting a high cash flow when the interest rates are rising, then you can concentrate on other profitable areas. For instance, an increase in interest rates can lead to a smaller rental income and cash flow, but by investing in a great location, you can count on high appreciation in the long run.
You don’t have to solely depend on one aspect of making a profit, that’s why balance is key.
Double Down on Location and Demand
Focusing on location and demand helps reduce the risks of negative returns from your rental unit. The more strategic the area of your real estate, the higher the potential demand and appreciation over time.
It’s easy to conclude that high interest rates can be an insurmountable issue, preventing you from dipping your hands in rental property investments. However, especially as a first time landlord, learning about the different ways rental properties create cash flow provides more options to gain greater income than you can imagine.
Increase in Rental Rates
Rent increases occur because of appreciation and inflation. However, if you have a fixed-rate mortgage, you won’t feel the impact of inflation as much. You can grow your income over time as your rental fees increase to keep pace with inflation.
Even if you need to pay for property tax and insurance, the increase in both of these costs won’t match the rental income increase. Your projected cash flow over time increases in contrast to the cost of paying a fixed-rate mortgage, bringing in better returns.
Ways to Increase Your Rental Income Profit and to Reduce Costs
Investors can tap into several methods for increasing their rental income and minimizing their rental property operation costs.
Upgrading the Property
Your rental needs to be in an outstanding condition to attract potential renters. Ensure that you’re offering great value, so the rental demand remains high.
Even if your property appreciates over time, you can still maximize your current rental income by performing regular property renovations. You can add desirable amenities to increase your rental fees and gain more positive cash flow from your property investment.
Refinance Your Mortgage
Interest rates don’t endlessly remain high. You just need to be patient and keep your eye on it. If it goes down, then you can consider refinancing at the newer, lower rate. It can be hard to tell when this will happen, but when the opportunity comes, go for it to keep a higher rental income.
Select the Right Location
Savvy investors are always on the lookout for properties in attractive neighborhoods that bring in high returns and long-term tenants. This entails in-depth research over what properties are likely to gain appreciation and a high market demand.
You can check for new infrastructures being built, job growth in the area, and the affluent reputation of a neighborhood since these drive the property values up.
Note that you can’t rely on what you expect to happen. You also need to have a sensible plan over how to maximize a property’s potential returns from other factors, and not simply because a neighborhood appears to be progressive.
Competing Against Inflation
Even if inflation is viewed in a bad light, it can be beneficial for rental properties. The cost of your fixed-rate mortgage remains predictable even if the value of money reduces. You won’t need to adjust for changing interest rates.
If you calculate your projected rental property earnings and take inflation into consideration, you end up paying less for a 30-year fixed mortgage term compared to paying for the property in cash using the present value. Inflation can become your ally, helping you save more over the long term.
Rental properties will always be a good investment! So long as you stay up to date purchasing methods and inflation, you can succeed in the rental property market.
If you’re looking to invest in a rental property, contact Get MULTIfamily Property Management today!