The real estate market offers plenty of lucrative investments and a stable source of passive income. However, as interest rates fluctuate, investors question whether real estate investments are worth the risk.
Believe it or not, a rental property can still be an excellent investment when interest rates are on the rise!
While it’s true that higher interest rates equate to higher mortgage payments, investing in a rental property when rates increase can offer many benefits.
In this article, the experts at Gifford Property Management will tell you how you can make a solid investment even when market trends don’t seem favorable. Keep reading to learn more!
Why Should Real Estate Investors Beware Rising Interest Rates?
The main reason why real estate investors should be cautious of rising interest rates is their impact on financing costs. When rates increase, so does the cost of borrowing.
This can make buying a property increasingly more difficult. Additionally, rising rates can increase property values, driving up the prices of homes significantly.
Rising interest rates not only make it harder to buy a property but can also reduce your profit margins. If your mortgage and maintenance payments are higher than your rental income, you’ll be left with a negative cash flow at the end of the month.
While you might be able to renegotiate your mortgage or increase rent prices later on, this can significantly affect the return on your investment.
Ideally, you should try purchasing an investment property when interest rates are lower. However, the real estate market is far from predictable, so you can never know when the right time for investing will come.
In most cases, purchasing a rental property when interest rates are on the rise is a far better investment than waiting for rates to decrease.
Reasons to Invest in a Rental Property Even When Interest Rates Rise
Rental properties are popular among real estate investors because they offer a stable source of passive income while also building long-term wealth. In addition to this, rental properties are a great investment, even when interest rates rise, for the following reasons:
Hedge Against Inflation
Whether you opt for financing out buying it in cash, purchasing a rental property means that you own a tangible asset with inherent value. Furthermore, the value of your property will increase over time, which will provide a hedge against inflation.
This is why many investors consider rental properties a solid buy-and-hold investment strategy that allows them to ride out periods of higher interest rates.
Stable Passive Income
Purchasing a rental property in a sought-after location will allow you to earn a steady passive income every month.
Additionally, if the price of rent is higher than your mortgage, insurance, and maintenance payments, you’ll be left with a positive cash flow at the end of the month. This money can be used for renovations or growing your real estate portfolio.
Favorable Return on Investment
Real estate investments have a high potential for long-term appreciation. As interest rates rise, so will the value of your property. Additionally, your rental income will increase over time. These two things ensure that you get a better return on your investment in the long run.
Leverage Advantages
When you invest in real estate, you can use leverage to purchase your rental property. When interest rates are low, leveraging can be incredibly advantageous. Even if rates rise, this strategy can be extremely useful.
For instance, you can opt for a fixed-rate mortgage to mitigate the impact of rising interest rates while making use of leverage to finance your investment.
Diversified Portfolio
Diversifying your portfolio helps keep your money protected. Real estate investments provide an excellent opportunity for diversification. Unlike other kinds of investments, the real estate market is far more stable.
Even if you purchase a rental property when interest rates are on the rise, you can rest assured that the value of your property will increase over time, and you’ll get a great ROI in the long run.
Tax Benefits
Real estate investors can enjoy many tax benefits. For instance, you can deduct expenses related to insurance, property upkeep, improvements, and mortgage interest. This makes rental properties a tax-efficient investment.
Not only will you get a hedge against inflation, but you’ll also be able to save a lot of money in the long run.
Demand for Rental Accommodation Is on the Rise
Nowadays, there are more renters than ever. The number of renter-occupied properties is expected to grow even more in upcoming years. This means that rental properties are an excellent investment.
By purchasing a rental with good amenities and a sought-after location, you can earn a high rental income.
This passive income should be enough to cover your mortgages and other monthly payments, such as maintenance, insurance, and property management fees. Even if interest rates rise, you can rest assured that your investment will remain profitable.
Protection Against Market Volatility
The real estate market is less volatile than the stock market. In past years, interest rates have risen significantly, but this has had a positive outcome for homeowners, as the value of their property has increased over time.
While the real estate market can fluctuate, its stability ensures that investors get a solid ROI in the long run, offering more security than other kinds of investments.
Bottom Line
Rental properties are still a good investment when interest rates rise for a multitude of reasons, including diversification of your investment portfolio, long-term appreciation potential, leverage advantages, and various tax benefits.
Moreover, investors have control over their investments and can adapt to changing market conditions, making rental properties an attractive option in both low and rising interest rate environments.
Ultimately, it’s up to you to decide whether to invest in a rental property when rates are on the rise. However, after reading this article, you are better prepared to make an informed decision to reach your investment goals.
Are you thinking about buying a rental property in Jacksonville, Florida? Contact Gifford Property Management today! With more than a decade of experience, we can help you make a solid investment and grow your wealth over time.
