Should You Buy a Rental Property During High Interest Rates?

The Short Answer: High interest rates don't automatically mean you should avoid buying rental properties. Smart investors understand that elevated rates often create unique opportunities that savvy buyers can exploit.

Why High Rates Aren't Always Bad for Investors

While high interest rates increase your monthly mortgage payment, they also fundamentally change the real estate market in ways that can work to your advantage. Here's what happens when rates rise:

What Decreases in High-Rate Environments

•Competition: Many buyers are priced out, reducing bidding wars
•Property Prices: Sellers become more negotiable when fewer buyers are active
•Investor Activity: Casual investors exit the market, leaving opportunities for serious players
•Seller Leverage: Motivated sellers accept lower offers to avoid holding costs

What Increases in High-Rate Environments

•Rental Demand: People who can't afford to buy become renters instead
•Negotiating Power: You have more leverage to ask for seller concessions
•Rent Prices: Strong rental demand often pushes rents higher
•Future Refinance Opportunity: Lock in a property now, refinance when rates drop

The Refinance Strategy: Buy Now, Refinance Later

One of the most powerful strategies during high-rate periods is the "marry the property, date the rate" approach:

How the Strategy Works:

1
Buy at a discount: Purchase when there's less competition and negotiate favorable terms
2
Accept the higher rate temporarily: Your cash flow might be thinner, but you own the asset
3
Refinance when rates drop: Lower your payment and increase cash flow significantly
4
Benefit from appreciation: You bought low and now have equity plus better cash flow

Real Example: If you buy a $400K property at 7% interest but negotiate a $350K purchase price, you're already $50K ahead. When rates drop to 5%, you refinance and your monthly payment drops by hundreds of dollars while you've already captured the equity gain.

When High Rates Make Sense (and When They Don't)

✅ Buy During High Rates If:

• You can negotiate significant price reductions
• Rental demand is strong in your market
• You have cash reserves for lower cash flow periods
• The property still meets your minimum return thresholds
• You plan to hold long-term (5+ years)
• You're comfortable refinancing later

❌ Wait or Avoid If:

• The deal barely cash flows at high rates
• You need immediate strong returns
• You lack cash reserves for thin periods
• Rental demand is weak in your market
• Property prices haven't adjusted downward
• You plan to sell within 1-2 years

Alternative Strategies for High-Rate Markets

1. Seller Financing

Negotiate with the seller to carry the loan at a lower rate than banks offer. Motivated sellers might accept 5-6% when banks are charging 7-8%.

Best for: Sellers who own property free and clear or have low existing mortgages

2. Assumable Loans

Find properties with assumable FHA or VA loans at lower rates. You take over the seller's existing low-rate mortgage.

Best for: Properties with government-backed loans originated during low-rate periods

3. House Hacking

Buy a 2-4 unit property, live in one unit, rent the others. Use FHA financing for just 3.5% down and offset your mortgage with rental income.

Best for: First-time investors willing to live in the property initially

4. Pay Points to Buy Down the Rate

If the deal is strong but the rate kills cash flow, pay discount points upfront to permanently lower your interest rate by 0.5-1%.

Best for: Deals with strong fundamentals that need a small rate reduction to work

Running the Numbers: What Actually Matters

Don't get paralyzed by interest rates alone. Here's what to focus on:

Key Metrics to Evaluate:

1. Cash Flow:

Can you cover expenses and mortgage with at least $100-200/month cushion?

2. Total Return (Not Just Cash Flow):

Factor in appreciation, principal paydown, and tax benefits - not just monthly cash

3. Purchase Price vs Market Value:

Did you get enough of a discount to compensate for higher rates?

4. Rental Market Strength:

Are rents stable or rising? High demand = less vacancy risk

5. Exit Strategy:

Can you hold through rate cycles? Do you have refinance flexibility?

The Bottom Line

High interest rates change the game, but they don't end it. Smart investors recognize that the best opportunities often appear when others are scared away by headlines about rates.

Focus on the fundamentals: Can you buy at a discount? Does the property cash flow (even if barely)? Is rental demand strong? If yes to all three, high rates are just a temporary obstacle to work around - not a deal-breaker.

Remember: Interest rates are cyclical. They go up, and they come down. Property ownership is permanent. The question isn't whether rates are high today - it's whether the deal makes sense for your long-term strategy.

Some of the wealthiest real estate investors built their portfolios during the high-rate environments of the 1980s (when rates hit 18%!) because they understood this principle.