Impact of rising interest rates on rental properties
With the rising interest rates, it’s easy to distinguish novice investors from the pros. In the face of an economic downturn, newbies tend to fret and worry about their rising loan costs, while other investors know that rising interest rates can have a positive effect on rental demand for them, and with the right strategies they can leverage it to their benefit. Want to know how interest rates can impact rental demand? Let’s dive in:
Impact on rental demand
Higher occupancy rates
Fill up your vacancies when inflation hits. Interest rates have an interesting dynamic with real estate. When taking a loan to buy a house becomes too expensive, more people look to rent rather than buy. As a result, investors who are willing to take out loans or already have rentals available are more likely to see a surge in prospective tenants applying for their units. Thus, for property owners currently battling with vacancies, now might be the perfect time to find new renters who are looking for a place to call home.
Potential rent increase
Set higher rental rates as the demand for units increases. With more competition in the rental market, tenants are often willing to compromise a bit of their budget when they find a rental property they like. As a result, investors can leverage this demand to request higher rates, thus, increasing profit margin. To take it further, landlords should also be strategic in choosing which home upgrades add value to the property. Vacancies vary from place to place, and if demand is lower in a specific neighborhood, there might be a need to put in more effort by updating flooring or refreshing walls with a new coat of paint outdoors to increase your curb appeal. However, even if renters are a dime a dozen in your area, strategic upgrades can make the rental stand out from the competition and command higher rental rates.
Higher renter stability
Expect tenants to stay longer during periods of inflation. If interest rates stay high for a long time, it could prevent more tenants from taking the leap and becoming homeowners themselves. Besides increasing the demand for rental units, it also means that renters who find a place they like are more likely to stay around for longer terms. As a result, investors who prioritize building a healthy relationship with their tenants can leverage that stability. When renters renew their lease, in the long run, it could mean fewer vacancy rates and lower turnover costs which could bring benefits to a rental property business.
Impact on rental property investors
Higher mortgage payments
Anticipate higher loan repayments as interest rates surge. When borrowing becomes more expensive due to rising interest, monthly mortgage rates also increase by making loans expensive. As a result, investors might enjoy less profits as it could potentially create cash flow problems if it is not balanced properly with the rental income.
In times of economic uncertainty, most financial experts advise opting for loans that offer fixed rates, because variable rates that continue to climb could exceed your monthly expenditure budget. On the other hand, a fixed repayment plan can help you budget better and avoid late penalties and fines. Enhance your rental with a hard money lender in Baltimore with these opportunities.
Increased carrying costs
Some investors may need to increase their budget when interest rates increase to keep the rental property business running. Rising interest rates don’t affect only property owners as it has ripple effects on the economy that cause other business owners to reevaluate their finances. In the long run, inflation causes the price of materials and labor to rise, which could affect the rental income when hiring a contractor for maintenance.
Even if the plan is to put off the renovation until interest rates fall, routine repairs and maintenance are essential to keep the rental in top condition. As a result, when interest rates go up, real estate owners often have to expand their maintenance budget to keep up with current prices. Hence, it would be best to balance any potential rental increase with your rising carrying costs.
Potential for higher returns
Leverage your economic situation to earn more profit in the long run. Despite the spike in loan repayments and maintenance expenses, savvy landlords can still make money when interest rates rise, especially if investors can lock in low-medium interest loans. Some alternative financing solutions, such as hard money loans – have higher interest rates with short repayment periods, quickly freeing the responsibility of loan repayments during inflation.
Besides using strategic financing, an increase in rental demand can also work in the investors’ favor. When buying homes becomes too expensive, it can dissuade more people from becoming homeowners, increasing the number of tenants bidding for one unit. However, while this could be an opportunity to hike rent prices, it is necessary to operate the rental carefully to avoid pricing out existing tenants or deterring new ones.
Landlord strategies to take advantage of rising interest rates
Adjust rental prices
Constantly monitor local rental markets to ensure maintaining competitive rates. The last thing landlords want to do is undermine the investment and earning potential during times of inflation. Research and read on listing sites to see what other landlords are charging for their apartments. Narrow the search down by focusing on similar properties in the location, with the same layout and upgrades. While this may not help find a replica based on the specifications set, investors can find a balance on the average price that doesn’t chase away potential renters who are looking for more affordable housing.
Long-term fixed-rate financing
When interest rates rise, it can be a struggle for investors to meet their loan repayments. Thus, rather than dealing with the potential implications of fluctuating rates, financial experts recommend opting for long-term fixed-rate financing. This solution locks in the loan at a fixed rate, making it easier to predict the next repayment and plan finances accordingly. However, if they are already using a variable-interest loan, look into refinancing options on the loan to avoid the fluctuating costs.
Explore diversifying investments
Thrive during economic uncertainty by diversifying your investments. A diversified portfolio is more likely to weather the storm during times of financial upheaval. As a result, it would be wise for investors to look into other areas of real estate that can provide an extra financial cushion. With the right strategy, housing flipping could be a highly lucrative means to get some quick cash. Real estate investment trusts are also an excellent alternative for low-risk investors.
Conclusion
The impact of rising interest rates on rental properties is far-reaching. By making home ownership less attainable, higher interest rates increase tenant demand and stability and allow landlords to increase the rental price as well. In return, higher rates also affect investors’ cash flow by increasing their mortgage payments and carrying costs. However, if you’re savvy enough, you can balance these extra expenditures with the potential for higher returns.
Ultimately, rising interest rates don’t have to spell disaster for you. As a landlord, several strategies can help leverage the economic situation to one’s benefit, including adjusting rental prices, using fixed-rate financing, and diversifying your investments.
