5 Reasons Why High Interest Rates Don’t Affect Rental Property Investments
Are you on the fence about investing in rental properties?
We get it. They say you can’t go wrong with (most) real estate investments. But with interest rates climbing and seemingly unpredictable, you might have second thoughts.
Rentals are often seen as a safe, reliable way to make money. Many investors choose them for a steady monthly income and long-term growth. So, while those new to the game worry that high-interest rates could affect their rentals negatively, moguls don’t flinch.
Why? Because there are several aspects of rental properties that make them relatively insensitive to changes in interest rates. Here are six reasons why.
1. Cash Flow
Rental income from tenants keeps your business running and cash flow consistent. Interest rates don’t affect this directly, as the tenant pays you a set rate for rent each month, regardless of the current state of interest rates.
For example, your cash flow remains the same if you’re collecting $1,500 in rent each month and the interest rate climbs to 6%. The only thing that affects cash flow is if you increase or decrease rent, which usually happens gradually over time, in line with market conditions.
2. Leverage
When you purchase rental property investments with borrowed funds, like mortgages, your return on investment (ROI) may be affected by changes in interest rates.
But since much of the funding for properties come from long-term mortgages, these are usually fixed-rate loans that don’t change with market fluctuations. In other words, they aren’t greatly affected by rising interest rates, and you can still leverage them to increase your ROI.
Moreover, when interest rates increase, it usually doesn’t affect how much someone can borrow for an investment property because lenders are more concerned about your ability to make payments on the loan than market fluctuations.
3. Inflation Hedge
Rising rents often outpace the rate of inflation, which means you can keep up with the rising costs of goods and services. While your monthly mortgage payments remain the same, your rental income may increase over time due to inflation. This is important because it allows you to stay ahead of the curve and maintain a steady cash flow despite interest rate changes.
For example, if the interest rate rises to 6% and your rental income remains at $1,500 each month, the real value of that rent actually increases due to inflation, and still makes you a profit on your investment.
4. Tax Benefits
There are several tax benefits that can help rental property owners save money year-round. These include deductions for property taxes, capital gains treatment for profits from selling a rental property, and depreciation on improvements made to a rental property. All these factors combined make renting out real estate one of the more tax-friendly investments available today.
For instance, suppose your rental property’s interest rate climbs to 6%. Even with this increase, you can still benefit from depreciation, capital gains treatment, and property tax deductions. As a result, you’ll save money through reduced taxable income and higher ROI.
5. Appreciation
Real estate values appreciate over time due to local market conditions and other factors related to rental demand. Interest rates play a minimal role here, so, while interest rates might have some impact, it won’t be enough to wipe out potential appreciation gains completely.
For rental investors, appreciation on your rental property means that even if interest rates climb, you can still benefit from the future appreciation of your rental property. This allows for more potential gains in selling and helps offset losses due to higher interest rates.
High Interest Rates? No Problem.
Rental property investments are an excellent way to create reliable income streams and long-term wealth. While it’s true that high-interest rates can have an impact on rental properties, several factors make them relatively immune to shifts in the market.
With careful consideration, you can invest in rentals with minimal risk—even with high-interest rates.
Reach out to our team of expert property managers today to learn more about what rentals could mean for you. You’ll journey into real estate with confidence, knowing that high interest rates won’t prevent it from being successful in the long run.