While high interest rates make investing in real estate more challenging, it remains a viable and profitable investment strategy. We also want to point out that real estate isn’t the only asset impacted by interest rates.
The stock market, for example, is also affected. High interest rates can negatively influence discount rates, borrowing costs, and consumer spending habits. These, in turn, influence the success of the stock market.
While stocks and other assets have their merits, residential real estate offers unique advantages that make it a compelling choice, even in a high-interest rate environment. We won’t say that investing in real estate is right for everyone. It depends on your financial goals, risk tolerance, measures of success, and investing style.
Here are some reasons to consider or continue investing in buy-and-hold real estate despite higher interest rates.
9 Advantages to Real Estate Investing (Even If Interest Rates are High)
1. Passive Income Generation
Residential real estate supplies a consistent source of rental income, which can help offset the impact of high-interest rates by enabling a faster mortgage pay-off. Rental income creates cash flow less susceptible to market volatility than stock dividends. While passive income isn’t the only source of value for investors, it’s a big benefit!
2. Be Proactive Against Inflation
Real estate famously hedges against inflation. In rising interest rates and inflation periods, the value of physical assets like real estate tends to grow. This preserves your wealth and buying power now and in the future. Interest rates may be tough to swallow, but real estate is one of the best ways to protect the real value of your wealth.
3. Leverage Opportunities
High-interest rates make it more expensive to finance real estate acquisitions, but they also present leverage opportunities. Borrowing at a fixed rate when interest rates are high is advantageous if inflation leads to rising property values and rental income. In general, leverage allows you to expand your portfolio more quickly while minimizing your cash contribution to acquisitions.
If interest rates make you nervous, you can also include bigger down payments to minimize their impact.
4. Tangible Assets
Real estate is a tangible asset that you can see and touch. This physical presence provides security and control over your investment, which is not true with many other assets like stocks or bonds. You know that real estate and the land will always be worth something. True crashes in the market are rare, while stocks come and go as businesses rise and fall.
5. Diversification
Diversifying your investment portfolio across different asset classes, including real estate, can reduce risk. Real estate investments often have low correlations with the stock market, meaning they may not follow the same patterns during market fluctuations. It’s never an “either/or” scenario with investing. You can “both/and” and benefit from different strategies simultaneously!
6. Tax Benefits
Real estate offers various tax benefits, including deductions for mortgage interest, property taxes, and depreciation. These tax advantages reduce your overall tax liability. Uncle Sam often rewards buy-and-hold investors. In fact, these benefits are one of the primary reasons investors choose real estate.
7. Investing through Appreciation
While rental income creates immediate returns, residential real estate also has the potential for long-term appreciation. Historically speaking, real estate values increase over time. Down the road, that appreciation can give you negotiating power to refinance a mortgage and further leverage wealth.
8. Betting on Growth
High-interest rates deter people from buying homes. Though housing demand may drop, rental property demand rises. Increased demand benefits real estate investors by increasing occupancy rates, reducing vacancies, and increasing rental rates. Combined, these make rental properties more profitable.
9. Hands-On and Flexible Decision Making
Real estate investors have significant control over their investments, especially compared to other asset classes. Investors direct property management, renovations, and improvements to enhance the property’s value and income potential. By contrast, only top shareholders have the kind of sway that affects stocks and their dividends.
However, we must acknowledge that investing in real estate, like any investment, comes with risks and responsibilities. Property management, maintenance, market fluctuations, and economic conditions shape the success of SFRs.
Before investing in residential real estate, especially in a high-interest rate environment:
- Conduct thorough research.
- Assess your financial goals and risk tolerance.
- Work with real estate professionals and financial advisors to develop a well-informed investment strategy.
If you do your due diligence, you can thrive in any market environment!
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