Why Rental Properties Are Still a Good Investment When Interest Rates Rise

Key Takeaways

• Rising interest rates create opportunities for long-term rental investors. While higher rates discourage homebuyers and slow sales, they increase demand for rentals, giving landlords stronger pricing power and reducing vacancy risks.
• Rental properties act as a hedge against inflation. As inflation drives up costs, rents and property values also rise, while fixed-rate mortgages provide stability and make long-term debt relatively cheaper over time.
• Investors still benefit from leverage and tax advantages. Even with higher borrowing costs, rental properties continue to generate income, appreciate in value, and offer valuable tax deductions that help offset expenses and protect returns.

During periods of rising interest rates, many investors may feel hesitant to enter the real estate market. However, while rate increases can create uncertainty, they do not diminish the long-term value of owning rental property. In fact, for strategic landlords, this environment can present an opportunity, as income-producing real estate often appreciates even during times of rising interest rates

In this article, we at TJC Real Estate and Management will explain why investing in rental properties during times of rising interest rates is still a good idea!

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Investing Concerns in the Face of Rising Interest Rates

In times of rising interest rates, the immediate reaction from people hesitation. To them, this surge translates to:

• Higher payments in monthly mortgage
• Cautious lenders
• Lower borrowing power
• Slower sales of properties
• Poor markets

All these may be true for those who only intend to invest in short term rentals. However, this is not the case for investors who intend to buy and hold the property for a long term for rental purposes. Although rising interest rates reshape the real estate market, it does not erase the business opportunity or potential returns.

Why Investing in Real Estate During Periods of Rising Interest Rates is Beneficial

The Demand for Rentals Goes Up

This is one area that people often fail to consider. When interest rates are rising, only very few people can afford to purchase homes. As a result:

• The overall demand to buy homes reduce and people resort to renting properties.
• Potential move-up buyers stay put and decide to rent during their transition stage.
• First-time rental property buyers sit out and choose to rent for a longer time.

Even when the mortgage payments and purchase prices are higher, the rent price also gets higher to balance the equation. Not to mention with fewer buyer entering the market, sellers have to offer competitive prices.

Rental Properties are Friendly to Inflation

One of the major reasons there is an increase in interest rate is to curb inflation. Although inflation stings other aspects of life, it usually benefits owners of rental properties. Why is that so?

For one, as the inflation increases, the rents also increase. Furthermore, values of properties increase during this period and mortgage debts tend to become cheaper. That means the money you owed remains the same, but your income from the rents are far higher.

Fixed-Rate Mortgages Allows Room for Stability

Unlike many other investments that are prone to volatility, rental property often provides greater stability through consistent housing demand. While rising interest rates can create challenges for new buyers, landlords with fixed-rate mortgages remain insulated from these increases.

Even for new investors, locking in a mortgage today can be advantageous, as fixed payments become less costly over time relative to inflation, essentially allowing them to pay tomorrow’s expenses with today’s dollars.

Leverage is Still Valid

It is true that higher interest rates also affect leverage. However, it does not erase it. Let us assume that you purchased a rental property for $400,000 with a 20% downpayment. You still own a six figure asset that provides tax benefits, appreciates over time, and generates rental income even with a higher interest rate.

Leverage allows you to use a little portion of your money to grow wealth. Although mortgage payments are higher than previous years, when the rents are also increasing and the property’s value soars over time, you will be at an advantage.

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The Rental Market is Stronger Due to Scarcity of Houses

The reality is that many markets still face a shortage of housing. Rising interest rates do not change the fact that people need places to live, especially in areas with expanding job opportunities or for those seeking flexibility before committing to a purchase. When buying becomes less accessible, demand for rental housing naturally increases.

In several cities, rental demand already outpaces supply, giving landlords stronger pricing power and helping reduce vacancy rates despite broader economic uncertainty. Properties that remain particularly attractive during this period include apartments near employment hubs or universities, single-family homes, small multi-family residences, and townhomes.

Tax Benefits are Still Valuable

Despite the higher interest rates, landlords still enjoy valuable tax benefits. Even when interest rates are reducing your profit margins, it’s advisable to use tax strategies to help you increase overall returns, reduce taxable income, and increase your cash flow.

Below are some tax benefits you stand to enjoy:

• Repairs and operating expenses write-offs
• Deductions of structural depreciation
• 1031 exchanges
• Deductions of mortgage interest
• Passive income classifications
• Capital gains treatment on sales

Bottom Line

While nobody loves higher interest rates, they help reduce competition and open doors for more patient landlords. If you understand your numbers, think long-term, can purchase in strong rental markets and stay disciplined, then investing in rental properties during spikes in interest rates can still yield good returns.

If you would like help managing your rental properties consider working with our trusted property management experts at TJC Real Estate and Management. Contact us today to learn more about our professional services!

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