Why Rental Properties Are Still a Good Investment When Interest Rates Rise

Rental properties are still a good investment even with rising interest rates. And here’s why…

In the U.S., rental property investors have access to long-term fixed-rate mortgages. This starkly contrasts mortgages offered in other countries, where mortgages tend to be variable, renegotiable, adjustable, or flexible.

These types of mortgages pose an inherent risk of unexpected hikes in interest rates for owners of the properties. 

With fixed-rate mortgages, you can rest easy knowing that the interest rate will be the same throughout the life of the loan. Specifically, the monthly payment of the principal and interest won’t change. 

However, what are you to do when those interest payments increase? Will owning an investment property still be profitable? Will it mean slowing down or entirely stopping investing in rental investments? 

 

Rental Properties are Still Good Long-Term Investments

Remember, a rental investment is a long-term investment. And while you may still be able to take advantage of a quick equity profit, you must remember that a good rental property’s ROI can only be realized over the long haul. 

Some investors only look at the cash flow when analyzing an investment’s profitability. For such a lot, they easily forget that the cash flow is pegged on what they can project today. 

 

 

Often, the number fails to account for other important things like rent increases, inflation, appreciation, and demand. All these factors will vary over time and will have a huge impact on your investment’s cash flow. 

When you invest in a real estate property, the following are ways that you can expect to earn money. 

 

• Cash flow. This is the difference between the income a property generates and the expenses. There are two types of cash flow: positive and negative. Positive cash flow means that the rental income is higher than your expenses. Contrastingly, a negative cash flow means expenses are higher than the rental income.
• Appreciation. This is the increase of a property’s value over time. Unlike cash flow, which is immediate, appreciation is only realized after the sale of the property. According to RocketMortgage.com, home appreciation rates have increased year over year to 5.5% as of February 2024. 
• Tax Benefits. As a landlord, there are certain costs of owning, operating, and maintaining a rental property that are tax deductible. This includes things like insurance, repairs, property taxes, mortgage interests, and utilities. The IRS also allows rental investors to deduct a portion of the property’s value from your taxes every year. 
• Property Equity. The opportunity to build equity is one of the main benefits of being a real estate investor. Equity is the difference between the property’s current market value and the outstanding mortgage balance. You build it every time you pay down the mortgage. 
• Inflation Hedge. Inflation is good for property investors. By hedging or leveraging inflation, you may be able to maximize your portfolio’s profits. 

 

 

Now that you understand how a rental investment makes money, you can exchange the consumer hat with an investor hat. It’s the consumer hat that causes people to think of rising interest rates as a rental investment’s deal breaker. But with an investor hat, you quickly start to identify ways in which you can maximize your income while minimizing expenses. 

 

Tips to Increase Your Rental’s ROI even with Rising Interest Rates

Below are some proactive things you can do to increase your rental’s Return On Investment even with rising interest rates. 

 

Pick the right location. 

Your journey to becoming a successful landlord starts here. You’ll want to invest in a great location that has appreciation potential and rental demand. 

Population growth, job growth, and gentrification are all signs of a good real estate location. 

 

Make first impressions count. 

As with any aspect of life, first impressions count. If your rental property looks like it has seen better days, tenants will avoid it. On the other hand, a good first impression sets renters up for liking the property and even wanting to pay more. 

You can boost the curb appeal by repainting tired walls, decluttering, cleaning thoroughly, installing outdoor lighting, and fixing broken stuff, among others. 

 

 

Consider adding more living spaces. 

You may be able to charge higher rents by adding more living spaces, such as bedrooms. Moving or removing walls that aren’t structural can allow you to reduce redundant spaces, extend rooms, or reposition areas. 

 

Add extra storage spaces. 

Providing tenants with extra storage spaces will make your property appealing to prospects. Consequently, you’ll have an easier time renting it out or finding a replacement tenant. 

If the property allows, you can add extra storage spaces through built-in solutions, garages, basements, and attics. 

 

Raise the rent amount. 

Conduct market research to know whether or not you’re charging the right rent amount. Overcharging or undercharging tenants will be counterproductive to your ROI. As such, conduct a comparative market analysis to determine what rent to charge tenants. 

However, should you need to raise rent, ensure it is in line with market value. 

 

Keep your vacancies low. 

This goes without saying! You won’t earn any income when your rental investment is vacant. Therefore, you’ll want to keep extended vacancy periods as minimal as possible. 

Savvy landlords often minimize vacancies by renting to quality long-term tenants, offering competitive rent, and offering quality amenities, among others. 

 

Conclusion 

As a potential rental investor, don’t let rising interest rates hinder your efforts to own a rental investment. Just do your due diligence and consider putting more money down on your mortgage to decrease your monthly payments. This can also land you a favorable interest rate as well. 

For expert help in the Chico real estate market, then look no further than IPM Property Management. Our goal is to make property ownership stress-free and profitable; get in touch with us to learn more!