Many people are looking for ways to diversify their investment portfolios, and one option could be purchasing real estate. The Federal Reserve has been raising interest rates in 2022, and they could continue the hike in 2023. What does this mean for people who are interested in purchasing rental properties in the current environment? There are a few key points to keep in mind.
Why Are Interest Rates Going Up?
There are plenty of reasons why the Federal Reserve is raising interest rates, but the biggest factor comes down to inflation. Inflation is rising at the fastest rate seen in several decades, and the Federal Reserve only has one tool at its disposal to bring them down. That means reducing the supply of money in the economy by making it more expensive to borrow money. When banks have to pay higher interest rates to borrow money, they pass those costs onto consumers in the form of higher interest rates for credit cards, car loans, and mortgages. As long as inflation remains high, the Federal Reserve will continue to raise interest rates.
What Does This Mean For Buyers?
What this means for people interested in buying a house right now, including a rental property, is that mortgage rates will be higher. This could make it harder for someone to purchase a rental property right now, but it might mean less competition and demand for homes. While interest rates might be higher, home prices might not be as expensive. While it is difficult to say if home prices will drop, and this is something that likely will vary from market to market, less competition might make it easier for people to “win” the home with a strong offer. It might also mean fewer bidding wars.
How Can Buyers Mitigate Higher Interest Rates?
The best way for buyers to mitigate higher interest rates is to borrow less. In short, that means bringing more cash to the table. The more cash someone puts down for a home, the less they will have to pay in interest. While interest rates might be higher now, buyers can refinance later when interest rates drop again. This could help buyers save money on a rental property.
