Before we explore why rental properties remain a good investment in times of rising interest rates, let's first understand why these interest rates matter. When interest rates increase, borrowing becomes more expensive. This might discourage some investors from jumping into the rental property market. However, it's important to look beyond this initial impact and consider the bigger picture.
Tangible Assets
One of the key reasons rental properties are still a great investment is their nature as tangible assets. Unlike stocks or other financial instruments, rental properties provide a physical asset that can generate cash flow and appreciate over time. Regardless of interest rate fluctuations, the property remains valuable and is a tangible asset investors can count on.
Rental Income
Another powerful aspect of rental properties is the potential for stable rental income. Even when interest rates rise, the demand for rental properties remains steady. Whether people are unable to afford a down payment or prefer the flexibility of renting, there is always a market for quality rental properties. This consistent demand allows investors to generate reliable income, making rental properties an attractive long-term investment strategy.
Appreciation
While generating rental income is a significant benefit, the potential for property appreciation cannot be overlooked. Historically, real estate values tend to increase over time, despite fluctuations in interest rates. This means that even if interest rates rise, the value of your rental property is likely to appreciate, contributing to the overall return on your investment.
Hedge Against Inflation
One often overlooked advantage of rental properties during rising interest rates is their potential as a hedge against inflation. When interest rates climb, inflation typically follows suit. As the cost of living rises, rental property owners can adjust rental prices accordingly, ensuring that their income keeps up with inflation. This ability to adapt and maintain purchasing power makes rental properties a resilient investment option in times of economic uncertainty.
Flexible Financing Options
Another great advantage of investing in rental properties is the flexibility in financing options. While interest rates may rise, investors can often structure their mortgage terms with fixed rates or secure financing when rates are lower. By taking advantage of these opportunities, investors can lock in favourable rates, protecting themselves from future interest rate increases.
Potential To Add-Value
The more desirable your property, the more value it will generate and the more demand it will drive. The most basic way of improving a property is by renovating it. When you upgrade a property, making it nicer and more attractive, you not only increase the overall value of that property, but you can also ask for higher rents. You’re merely speeding along those profits past what the higher interest rate is costing you.
One of the biggest things you should remember with rental properties is that they are, in fact, long-term investments. Sure, some people may see a quick equity profit through improvements or value-adds, and some may land deals with significant cash flow from the start. Still, as a general rule, you must remember that rental properties see the most profit over the long haul.
Often when we analyse a rental property’s finances, we only see the cash flow number that’s right in front of us. It’s easy to forget that the projected cash flow is simply what’s projected today. That number doesn’t account for rent increases over time (while keeping a fixed mortgage payment), appreciation, demand, and inflation. All of those factors will continuously change, hopefully for the better.
So there you have it! Even when interest rates rise, rental properties can still deliver solid returns and remain a good investment option. From their nature as tangible assets, stable rental income, potential for appreciation, inflation hedge, to the flexibility in financing options, rental properties possess qualities that make them resilient investments. As always, it's crucial to do thorough research and consult with professionals before making any investment decisions.
If you are looking for a buyer’s agent to assist you with purchasing a home or investment property in NSW, QLD, VIC, SA or WA, please get in touch the team at Ready Set Buy - Property Buyer's Agents or give us a call on 1300 289 372!
Disclosure: The information contained in this blog is our personal opinion only and is not to be taken as financial advice, as we do not know your financial situation. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances. We will not be held liable for any losses.
Comments