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

Being a landlord can be a lucrative venture. If you buy the right property and rent to a great long-term tenant, among other things, you can enjoy passive income for many months to come.

Be that as it may, mortgage interest rates can seem to be a stumbling block in this quest. They can fluctuate and rise, which can potentially impact your bottom line. And this brings us to today’s question: Are rental properties still a good investment with rising interest rates?

Even with rising interest rates, investing in a rental property can still be a smart financial move. In today’s blog, our experts at Castle Management explore why you shouldn’t hesitate to pursue rental property investments, even when interest rates are on the rise.

Why are Rising Interest Rates a Concern to Real Estate Investors?

Rising interest rates are a concern to real estate investors because of their financial impact. When interest rates go high, it means that the purchase cost of a rental property also goes up.

And with the high property purchase price, it also means reduced profit margins.

Preferably, aim to buy an investment property when the prices are still low. That’s why staying up-to-date with the prevailing market trends is key when considering buying an investment property.

That said, real estate markets are often dynamic, and there is no perfect time for property investing. Sometimes, buying a property when interest rates are high can be better than waiting until the rates start to reduce.

Why Should You Consider Investing in a Rental Property When Interest Rates Are Rising?

Rental properties are a popular investment tool for multiple reasons, regardless of the interest rates.

Recurring Rental Income

This is the top reason why most real estate investors choose rental properties: the potential for steady, recurring rental income. When done correctly, a rental property can provide monthly income for years to come.

However, success isn’t guaranteed; you need to take the right steps. That includes investing in the right property, setting a competitive rent, and selecting reliable tenants. It's also important to keep your operating costs under control to ensure you generate consistent positive cash flow each month.

Appreciation in Value

Real estate tends to grow in value over the years, allowing you to sell for a much better price down the line. As interest rates increase, property values often follow, strengthening your overall investment. In addition, rental income usually rises too, helping you boost your returns and make the most of your property.

Hedge Against Inflation

A real estate property is a tangible asset that has an inherent value. And this is regardless of whether you buy it in cash or opt for financing.

As previously mentioned, real estate investments usually increase in value over time. And as it increases in value, it’ll act as a hedge against inflation.

This is one more reason that makes rental properties a good investment when interest rates rise.

A Good Return on Investment (ROI)

Rental properties generally offer a strong return on investment through two main financial benefits. First, there's the potential for long-term property appreciation, which can significantly increase the value of your asset over time.

Second, as a landlord, you may be able to raise the rent annually depending on the type of lease and local market conditions. These factors combine to provide a solid and growing ROI for your rental investment.

Portfolio Diversification

Diversifying your investment portfolio is key to spreading risk and minimizing losses. And investing in real estate can provide you with a perfect opportunity to do so. Why? Because the real estate market is comparatively stable.

Even when the interest rates are high, you can buy a rental property knowing that its value is going to increase in one way or another.

Tax Deductions

As a landlord, you can benefit from a smorgasbord of tax benefits from renting out your multi-family property. For example, if you have to travel to check on your property, you can deduct the cost of your travel expenses, such as airfare, car mileage, and hotels.

Other deductible expenses include mortgage interest, personal property taxes, repairs, and legal fees. By removing such deductions from your tax bill, you can minimize expenses and keep more of what you earn.

Rental Demand

Demand for rental properties continues to be high. And this is projected to continue in the future. This means that rental investments will continue to be in demand. This is especially true if you buy the right property, in the right location, and with the right amenities.

Additionally, the higher the demand is for your rentals, the higher the rent you can charge. So, even if interest rates rise, you can rest easy knowing you’ve made the right investment decision.

Less Volatility

Ever tried your luck in the stock market? Then you probably know that it’s one of the most volatile investments an investor can make. And such market swings can be tough to stomach.

Luckily for you, the real estate market is the exact opposite. Resultantly, you can expect smoother and predictable returns.

Bottom Line

To sum up, don’t let rising interest rates discourage you from investing in real estate. This can be one of the worst mistakes you could make as a budding investor! Rental properties can provide you with a myriad of benefits. Including, investment diversification, long-term appreciation, tax benefits, and a recurring monthly income.

That said, to reap such benefits, you have to get certain things right. Including buying the right property, in the right location, renting to great tenants, and abiding by the applicable landlord-tenant law.

And this is where Castle Management comes in! We’re a trusted property management company in the Bay Area. With over 39 years in the business, you can trust that we have deep-rooted experience and knowledge to help you thrive. Get in touch today to learn more about how we can help you realize your investment goals!