On March 16th, 2022, the Federal Reserve raised the interest rate paid on reserve balances by a quarter point and again by half a point during that year’s May meeting. With interest rates only expected to rise, the US currently has the highest interest rates since the 1980s. Understandably, this has some people concerned, and investors need to be aware of the effect interest rates have on property leasing.
Higher Interest Rates Make It Harder To Borrow
When the paid interest rate on reserve balances rises, it becomes more expensive to borrow money. For most property investors, simply paying out of pocket is not an option. The more expensive it is to borrow money, the less accessible real estate investing becomes, which decreases the number of competing investors on the market. Less competition may sound ideal to some, but this isn’t always the case. In truth, this is only the first piece in the larger domino effect.
The Cost of Living Affects Rental Supply
Most people need to borrow money to make big-ticket purchases like cars, homes, and other expensive items. If people can’t borrow money to buy these items necessary for day-to-day life, then the cost of living is increasing.
What does this mean for the rental market? If homeowners are struggling with regular living expenses, they’re probably also struggling to maintain their home and overall ownership. If a homeowner can’t keep their home, they’re going to try to sell it, and then one of two things can happen.
If they’re able to sell their home, they’ll either downsize or move into a rental, increasing the demand for rentals as a result. On the other hand, they may not be able to find a buyer due to the high cost of living. This means that the homeowner will either have to rent out a part of their home or liquidate the property entirely to get rid of the asset. In both scenarios, homeowners who can no longer afford their homes will have to downsize or live in a rental property.
An increase in rental demand will affect the supply. Whether this will impact you positively or negatively will depend on the conditions in your local market.
Conditions May Vary Depending on Location
In the end, it’s highly likely that the rise in interest rates will increase the demand for rentals. If the supply of rental properties in your area is low, you may be able to increase your asking price due to the high demand. However, if the rental supply in your area is high, you’ll have to deal with more competitive pricing, and rental rates will fall.
Ultimately, the effect interest rates have on property leasing varies depending on the market conditions in your area. However, one thing is for certain: with interest rates on the rise, it will only become more expensive for buyers to invest in real estate.
If you’re struggling to find quality properties to invest in or need help setting the right rental rate for your property, let Excalibur Homes help. We’re a Jacksonville, Florida, property management company with decades of experience in the field. Our experts will work with you to make buying, leasing, and renting as easy as possible.
