How Higher Mortgage Rates Can Benefit Rental Investors
Rising mortgage rates can have a significant impact on the housing market. For many homeowners, it can mean higher monthly payments and increased financial strain. However, for rental investors, rising mortgage rates can actually be a benefit. If you are a rental property owner, here are some reasons rising mortgage rates can be advantageous.
$2,000 Quarter? Check Your Pockets Before You Use This 2004 Coin
See: 3 Things You Must Do When Your Savings Reach $50,000
First, the Downsides
Before we get into the benefits, let’s go over the obvious downsides of higher mortgage rates. Rising mortgage rates can make it more difficult for rental investors to secure financing for new properties. For those who are able to pay for new rentals in cash, it doesn’t pose much of a problem. For investors who don’t have that kind of liquidity, it can get a little tricky. This is why it’s important for rental investors to be aware of the current mortgage rate trends and to plan accordingly.
If you’re looking in an area with high investor competition, it’s not a bad idea to look into mortgage preapproval. Having most of the application process out of the way can enable you to move quickly if a good opportunity arises.
One way to mitigate the impact of rising mortgage rates on rental investors is by looking into alternative loan options. For example, a number of private lenders offer loans specifically designed for rental properties that can have more favorable terms than traditional mortgage loans. Some investors use a line of credit allowing them to borrow funds as needed rather than taking out a traditional mortgage loan.
Big Changes Since 2021
Statistics from the National Association of Realtors show the average rate for a 30-year fixed-rate mortgage was 2.9% in January 2021. This increased to 3.3% in October 2021. According to the same source, the median home price in the U.S. was $315,000 during that time. Therefore, if the interest rate increased by just 1%, the monthly payment on a 30-year fixed-rate mortgage would increase by $69. That doesn’t sound like much, but it comes to an extra $24,840 over the life of the mortgage.
The example above shows a big difference between 2.9% and 3.3% rates back in 2021. Here in the early days of 2023, 30-year mortgage rates are sitting around 6.3%. Big changes have already occurred, and it’s possible rates will continue to rise.
For those looking to buy and live in a home, interest payments are a big concern. Unless a household itemizes its tax returns, mortgage interest payments don’t provide any deduction. For investors, however, those interest payments are deductible as a business expense.
Take Our Poll: How Much of a Tax Refund Do You Expect in 2023?
Homebuyers Are Delaying the House Hunt
One of the main ways that rising mortgage rates benefit rental investors is by making it more difficult for potential homeowners to afford a home. As mortgage rates increase, the monthly payment on a home loan also increases, making it harder for many people to qualify for a mortgage. This can lead to a decrease in the number of people looking to buy a home and an increase in the number of people looking to rent. This can drive up demand for rental properties. And with the general rule of supply and demand, it can lead to higher rental income for investors.
Now, those who are finding it difficult to afford a home may not give up on that dream entirely. As the cost of borrowing increases, it becomes less attractive for renters to take on the added financial burden of a mortgage. Instead of deciding to never buy, renters may decide to continue renting until they increase their wages or rates go back down. This can lead to more renters staying in their current rental properties for longer periods of time, which can lead to more stable rental income for investors.
Rental Property Values Increase
Another benefit of rising mortgage rates for rental investors is that it can increase the value of their existing properties. As the cost of borrowing increases, the value of rental properties relative to the cost of a mortgage also increases. This means that rental properties become more valuable as an investment compared to buying a home.
Returning to the concept of supply and demand, rental property values can also increase from rising standard renting rates. With this appreciation in value comes other benefits. This includes providing investors with the potential for capital appreciation as well as rental income.
Furthermore, with the rise in mortgage rates, rental properties can be a more attractive investment option for those looking for long-term returns. Assuming that many individuals continue to be unable to afford purchasing a home, rental properties can provide a steady stream of income for investors over time.
Diversify For Market Fluctuation
As a reality check, there’s always the possibility that rates might plummet again within a few years. If that happens, lower-value rentals might not be as in demand. After all, if impediments to buying are lessened, first-time homebuyers might take the plunge rather than continue renting.
To mitigate these risks, rental investors can consider diversifying their rental portfolios. This could include investing in properties in different geographic locations and in different price ranges. Investors can also consider investing in properties that have the potential for value-add opportunities, such as renovating or developing the property.
Use Mortgage Rates to Your Advantage
Rising mortgage rates can have both benefits and risks for rental investors. While it can lead to increased demand for rental properties, it can also make it more difficult to secure financing. However, by being aware of these risks, rental investors can make the most of the opportunities presented by rising mortgage rates.
More From GOBankingRates
- 11 Grocery Items To Buy at Dollar Tree
- Got a Question About Money? Ask an Expert
- Maximize your savings with these 3 expert tips
- Take Our Poll: How Do You File Your Taxes?
