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Key Takeaways
Rising interest rates increase rental demand and reduce homeownership affordability, which benefits landlords.
Rental property values and rents often rise over time, helping offset higher borrowing costs.
Real estate investments offer long-term advantages like tax benefits, appreciation, and market stability.
Over the past few years, interest rates have climbed at a pace not seen in more than a decade. This change has led many investors to question whether now is a good time to buy real estate, especially rental properties. Concerns about higher mortgage payments and how they impact overall returns are common.
However, despite the rise in borrowing costs, rental properties continue to offer strong long-term investment potential.
Higher interest rates may require some adjustments to your strategy, but they do not eliminate the benefits of owning rental real estate. In fact, for many landlords, this environment offers new opportunities to build equity and generate steady income.
SGI Property Management Phoenix created this guide to explain why rental properties remain a smart investment choice, even in a high-interest-rate market, and what landlords can do to succeed.
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1. Rental Demand Remains Strong
When interest rates rise, buying a home becomes more expensive for the average person. Higher monthly mortgage payments reduce homeownership affordability, causing many people to delay buying and continue renting instead. This trend increases rental demand.
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In areas like Phoenix, where population growth is steady, demand for rentals remains high. People continue relocating for jobs, school, or lifestyle improvements, even if they cannot buy a home. This ongoing demand helps landlords maintain high occupancy and stable rental income as long as your rental meets safety standards.
2. Rents Typically Rise with Inflation
Interest rate increases are often used to fight inflation, but inflation still causes the cost of goods and services to go up, including housing. Over time, rents tend to rise alongside inflation, which allows landlords to adjust rental prices accordingly. Learning how inflation works can help you make a smart investment!
If you bought your property when rates were lower, your mortgage may be fixed while rents increase. Even if you purchase at today’s higher rates, future rent increases can help offset higher monthly payments and improve profitability over time.
3. Property Values Tend to Appreciate Over Time
While real estate markets can fluctuate in the short term, property values typically increase in the long run. This appreciation contributes to your overall return on investment. Appreciation is one of those terms all real estate investors should know.
Even if rising rates slow home price growth temporarily, holding onto your property for several years often results in solid gains. Appreciation builds equity, which can also support refinancing opportunities if interest rates decrease in the future.
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4. Long-Term Benefits of Leverage
Using financing to purchase a rental property allows you to leverage your investment. Although higher interest rates increase monthly costs, the ability to use a mortgage to buy a higher-value asset remains a key advantage.
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Your tenants help pay off your loan through monthly rent, allowing you to build equity over time. With rising rents and property appreciation as opposed to depreciation, leverage still provides an efficient way to grow your portfolio, even in a high-rate market.
5. Tax Advantages Help Reduce Costs
Owning a rental property comes with several tax benefits that help lower your taxable income. You can deduct mortgage interest, property taxes, repairs, insurance, and depreciation, among other expenses.
These deductions can help offset increased borrowing costs, making rental real estate more financially attractive than many other types of investments. A qualified tax advisor can help you take full advantage of these opportunities.
6. Less Volatility Compared to Stocks or Bonds
Rental properties typically offer more stability than stocks or bonds, which are more sensitive to interest rate fluctuations. Rising rates often lead to market volatility, causing investment portfolios to lose value or become unpredictable.
By contrast, rental real estate can provide consistent income and long-term value, especially in high-demand markets. This makes it a useful option for investors looking to diversify and reduce exposure to short-term market swings. These are some of the questions to ask before investing in real estate.
7. High Rates Can Discourage New Construction
Higher interest rates make construction loans more expensive for developers. As a result, fewer new housing units may be built, which limits the supply of available rentals.
For current landlords, this can be a significant advantage. With less new inventory entering the market, your existing rental property may become more desirable, allowing you to increase rent and attract quality tenants in a tighter market.
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Bottom Line
Rising interest rates do impact borrowing costs, but they do not erase the long-term value of investing in rental properties. Factors like continued rental demand, increasing rents, long-term appreciation, tax advantages, and market stability all support the case for real estate as a worthwhile investment.
SGI Property Management Phoenix helps landlords navigate changing market conditions by offering expert property management services that improve tenant satisfaction, reduce vacancies, and protect your bottom line.
Whether you are purchasing your first property or expanding your portfolio, our team is here to help you succeed in any interest rate environment.
Contact SGI Property Management Phoenix today to learn how we can help you grow your rental investment with confidence.
