The U.S. economy has been fluctuating, with inflation reaching its highest rate since the 1980s. The continuing Covid-19 pandemic has put further pressure on the economy as well. The real estate industry has also faced rising loan costs, which impact investment strategies and rental prices. Thus far in 2022, the Federal Reserve has raised the benchmark interest rate four times, including a 0.75% bump in June and July.
Experts predict the Fed will increase interest rates again this year, which could point to a steadying economy because the government only raises interest rates if they believe the economy can handle the higher percentage. Even with the recent jumps, the interest rates are still historically low.
What does this mean for landlords? Overall, real estate investors and those with rental properties are swimming in unchartered territories. While landlords will often make more money from rental units with higher interest rates, the rising interest rates could impact your rental business in four ways.
A cooling housing market. A higher interest rate means a higher mortgage payment for most buyers. The slowing housing market also makes buying and selling a home more challenging. Therefore, homebuyers might be more likely to halt or slow future home purchases during this time of interest rate fluctuation.
More demand for rental properties. With more homebuyers suspending their purchase of a residence, more people will be looking for apartments, townhomes, and single family homes to rent. This is especially true for first-time buyers, who will probably stay in their current rental situation longer than anticipated. These two factors will put pressure on the available rentals, creating additional opportunities for landlords.
A potential decrease in rental property values. Interest rates also impact real estate values. For landlords, higher interest rates could trigger a slower appreciation or a drop in rental property value. Rising interest rates could also translate into less availability of capital and investment demand.
Favoring cash offers on new properties. During times of rising interest rates, cash is still king when it comes to real estate purchases. Increased borrowing costs because of higher interest rates may mean a drop in overall cash flow for landlords, which could make it harder to close on new investment properties. Real estate investors with cash offers will come out on top more often.
There’s no question higher interest rates will spur rent growth. By considering these factors, landlords can position themselves to meet the current demand while planning for the future.
About Rentals America
Rentals America provides full-service property management for residential rental properties. Our team is completely dedicated to property management and we’re here to help landlords navigate the rental market.
