Real estate investments offer many benefits over other kinds of investments, such as stocks or trades. For instance, the real estate market is more stable, and some of its investments, such as rental properties, allow you to earn a passive income while also building your long-term wealth.
Investing in real estate is not without its risks. Real estate investments require substantial upfront costs, including down payments, closing fees, and maintenance expenses. They are also susceptible to market fluctuations and rising interest rates.
However, with over 30 years of combined experience in the real estate market, the team at East Bay Property Management knows that rental properties are a solid investment even when interest rates rise. Keep reading to learn why!
How Higher Interest Rates Affect Rental Property Investors
It’s common knowledge among real estate investors that rising interest rates make buying a home more difficult. That’s because when interest rates rise, so do mortgage rates. This makes the cost of buying a property much more expensive.
Moreover, interest rates can influence the value of real estate properties. High interest rates can highly increase property values, driving up prices. This typically means a higher down payment and higher mortgage payments for investors.
Ideally, it’s best to buy a house when interest rates are low, but since the real estate market is unpredictable, you can never know for sure when the right time for buying will be. Luckily, investing in a rental property when interest rates are on the rise doesn’t have to be a bad thing.
Why Invest in a Rental Property When Interest Rates Are on the Rise
There are many ways individuals can invest in real estate. For instance, they can invest in plots of land or residential and commercial properties. There are also passive investments such as real estate trust investments (REITs) and real estate crowdfunding.
Many investors opt to purchase rental properties. One of the main benefits of this kind of investment is that it allows you to earn a steady cash flow while also growing your equity over time.
It’s true that high interest rates make it more expensive to purchase a residential property, but don’t be discouraged! Here are seven reasons why rental properties are still solid investments even when interest rates are on the rise:
1. Stable Cash Flow
The main reason why people invest in rental properties is because these investments offer a steady passive income. Once you find reliable, long-term tenants, you can rest easy knowing your rental will be generating a steady cash flow each month. Plus, the price of rent can be increased as the cost of living rises to ensure the investment remains profitable.
The best part is that you can use that stable cash flow to pay your mortgage. Or, if your mortgage is already paid off, you can save that money for the down payment on another property.
2. Favorable Return on Investment
The price of real estate properties has increased exponentially over the years, as the price of homes grows along with inflation and the cost of living. This has caused an increased interest in renting over buying, meaning that a rental property in a good neighborhood can be rented easily and at a more competitive price.
Additionally, as the years go on, the value of your property will increase significantly, ensuring you get a good ROI.
3. Portfolio Diversification
Keeping all your eggs in one basket can be risky. Luckily, you can protect yourself from market fluctuations by diversifying your portfolio. Real estate investments are a great option for this.
The real estate market is far more stable than, say, the stock market, so your money will be safer with a rental property. You can rest assured that your money will grow steadily over time.
4. Ample Tax Benefits
Real estate investments come with many tax benefits. Expenses linked to insurance, property maintenance, repairs, and renovations often qualify for tax deductions. The money you save through deductions can help you counter the cost of rising interest rates.
Moreover, investors can defer capital gain taxes when they sell an investment property through a 1031 exchange. This is done by selling the property and purchasing a “like-kind” property next. For instance, you could sell your current rental property for another similar one.
5. Rising Demand for Rental Housing
According to recent reports, there are more houses on rent now than in any period since the mid-1960s, and experts don’t think the demand for rental accommodations will decrease at any time in the foreseeable future.
With so many renters looking for suitable accommodations, purchasing a rental property is a great investment! Even if the initial investment is higher due to the rising interest rates, you can trust that you’ll be earning a passive income in no time.
6. Opportunity to Refinance Your Mortgage
Even if you initially get stuck with high mortgage rates, it’s not the end of the world. If interest rates ever decrease down the line, you can try to refinance your mortgage. This can potentially lead to lower rates, reduced monthly payments, and decreased overall borrowing costs.
7. Variety of Financing Options
A traditional mortgage is not the only way you can finance a rental property. There are many other great financial alternatives you can try, such as owner financing, home equity loans, or margin loans, to name a few!
Bottom Line
Investing in a rental property comes with many benefits, including a stable passive income, portfolio diversification, and tax advantages. These advantages ensure that you get a good return on your investment even if you purchase a rental when interest rates are higher.
Now that you know the benefits of owning a rental property, you can decide whether this is the right type of investment for you.
Are you thinking about buying a rental property in the East Bay area? Contact East Bay Property Management today! With over three decades of experience, we know what it takes for a rental property to become a profitable business.
