Key Takeaways
- Rising interest rates for properties can be an intimidating hurdle for investors to cross.
- However, hikes in interest rates don’t always mean the property’s profitability needs to suffer.
- Partnering with a property management company can improve your property’s success while reducing your workload as a rental owner.
Interest rates affect everything. By raising or lowering the prices of goods and services, interest rates alter markets by changing the behavior of buyers and sellers. For property investors and those looking to invest in rental properties, higher interest rates mean higher mortgage payments.
- Does it make sense to keep investing in rental properties despite the higher cost of borrowing?
- Should I hit pause on my plans to buy new properties?
- How will higher interest rates affect the performance of my properties and my prospects as an investor?
Investors ask these questions because of how high interest rates affect the cash flow from their properties. But this impact, while undeniable, does not diminish the value of rental properties as a reliable investment, even in a high-interest-rate economy. As a matter of fact, it enhances it. Read this guide by Campus Connection Property Management below to learn more.
Why Rental Properties Are A Winning Investment Even When Rates Rise
The superiority of rental properties as a desirable investment option in times of rising interest rates lies in the following facts about rental properties.
A Source Of Stable Income
Unlike volatile assets like stocks and bonds, rental properties offer investors a source of reliable income. Dependable income means peace of mind and the financial stability to negotiate the economic difficulties occasioned by higher interest rates. As will be shown later in this article, by improving the quality of their rental properties while reducing tenant turnover rates, landlords may even find ways to neutralize the impact of higher interest rates on their purchasing power.
Tax Deductions
Higher interest rates do indeed mean higher mortgage payments on investment property loans, but this burden is offset by regulations that allow property investors to make tax deductions for mortgage payments. A significant portion of the money landlords pay to banks as loan repayments eventually finds its way back into the pockets of those same investors. Also, even if high interest rates push the cost of repairs, maintenance, and professional fees higher, these costs may be partly recouped through tax deductions.
Increased Demand For Rental Properties
Higher interest rates mean higher borrowing costs not just for property investors but also for everyday citizens trying to buy their own homes. These higher rates invariably mean that a lot of people will be priced out of the home-buying market, forcing them to resort to renting their homes. An unintended consequence of higher interest rates is that there will be a lot more people looking to rent the available rental properties. The overall effect of this is a larger pool of potential renters for landlords, as well as potentially higher rental rates. For landlords, this can result in full occupancy and improved returns.
Control Over Rental Rates
Rents are one of the few things in the economy that keep pace with the rate of inflation. As high interest rates push the prices of goods and services upwards, they also exert an upward pressure on rents, because rental properties are also a service. Landlords have the power to adjust the rent to reflect the current realities of the economy. As long as it is done within legal limits, this provides an avenue to offset the impact of high interest rates on the operational costs of an investment property. Other investment options do not come with this kind of flexibility.
Rental Property Strategies For A High-Interest-Rate Economy
Investors can use these strategies to maximize their returns in the midst of rising interest rates.
Choose The Right Investment Location
A good location is everything when investing in rental properties. In tough times, this reality becomes even more important. The right location affects rents, occupancy rates, the quality of tenants a landlord can find, and rental property appreciation rates. It is easier to shake off the effects of high interest rates when your property is located in an area with good schools, low crime rates, an abundance of high-paying jobs, good roads, and lots of amenities. It is also easier to achieve the rest of the strategies in this list if you satisfy this first condition.
Improve Your Rental Property
There are two parts to this: lower operational costs and improved revenue. You cut costs by paying attention to the physical condition and performance of the main systems and structures of your building. Projects like repiping or rewiring a building will not impact directly on the rental rate, but they will shave hundreds, if not thousands of dollars, off your maintenance bill. The other part of this is projects that improve the curb appeal and comfort of your rental. Making your property nicer will not only increase its market value, but it will also let you attract higher-quality renters who are able to pay the higher rent you charge for your much-improved property.
Improve Marketing, Tenant Screening, And Tenant Relations
Your marketing systems are more important than the quality of your rental property. A great property that is poorly-marketed will attract average renters paying an average rent. On the other hand, an average rental will get above-average results if it employs excellent marketing strategies. Marketing is critical; do not treat it as an afterthought. Tenant screening can undo or cement all the good work you have done through your stellar marketing strategy. Time and money spent on this critical step are not wasted. Tenant screening, along with how well you treat your tenants, is the key to higher tenant retention rates in a rental property.
Refinance Your Mortgage
Do not forget that you always have the option to refinance the property at a lower interest rate if the rates drop. Mortgage refinancing not only means increased cash flow due to lower mortgage payments and improved access to cash for your operational or personal needs, it also provides you with a lump sum to upgrade your existing property or make a down payment on a new rental property.
Property Management
Lastly, you’ll want to invest in professional property management. A good property management firm will already have strategies in place to help you overcome the challenges of operating in an economy with high interest rates. They can simply plug you into their existing system, helping you achieve the above strategies with minimal effort on your part.
Final Words
Investing in rental properties can be a daunting endeavor, especially with rising interest rates. However, with the property planning, the profitability of your investment doesn’t have to suffer. By partnering with a professional property management team like Campus Connection, you can more effectively navigate the rental management world. Reach out today to learn how we can help you.
