RENTAL PROPERTIES: A GOOD INVESTMENT DESPITE RISING INTEREST RATES.

 RENTAL PROPERTIES: A GOOD INVESTMENT DESPITE RISING INTEREST RATES.

Despite higher interest rates , one asset class continues to shine: rental properties.

Although many investors rethink their investment strategies regardless of the interest rate environment, rental properties offer a steady stream of passive income and long-term appreciation potential.

In this article, we will explore why long-term rentals are a smart investment option in any economy.

How they can provide protection against inflation, or even a reliable path to financial freedom.

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A rental property is a long-term investment

One of the most important things to remember about rental properties is that they are actually long-term investments.

It is important to remember that you will not be able to make a quick financial switch from long-term rental.

Of course, some people may see a quick return on their equity through improvements or added values.

However, as a general rule, you should remember that rental properties generate the most profit in the long run.

Often, when we analyze the finances of a rental property, we only see the cash flow figure right in front of us. It's easy to forget that projected cash flow is simply what we expect to see today.

This figure does not take into account rent increases over time (while maintaining a fixed mortgage payment).

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How to make money with long-term rentals in the USA?

Before you learned about long-term real estate investing, you may have known that rental properties can be very profitable.

What makes a rental property profitable?

The five ways rental properties can make money are:

Constant and stable cash flow

Appreciation of the property

Tax Benefits

Equity built up through mortgage repayment

Some hedge against inflation

If cash flow is declining, which happens with a higher interest rate, there may be other areas of profit with potential.

Perhaps you are buying in an area that is in high demand and undergoing gentrification, so you can speculate that the appreciation potential is very high.

Imagine a bar chart with one bar for each type of profit.

If one of them is down, are the others up? If they're all down, that's a problem. If some are higher than usual, does that balance them out? It all depends on your situation.

Focus on location and demand.

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Rent increase

As we've already pointed out, the projected cash flows of a rental property are based on today's rents, not tomorrow's.

Rents increase for two reasons: appreciation and inflation.

Guess what doesn't increase over time and isn't affected by appreciation or inflation? Your mortgage payment when you have a fixed-rate mortgage.

This means that your cash flow margin will continue to grow throughout the life of your rental property, as you continue to increase rents.

Your expenses, such as property taxes and insurance, may increase over time, but they're unlikely to increase at nearly the same rate as rent. Overall, you'll find that rent will continue to move further and further away from your fixed-rate mortgage expenses, and your profits should continue to grow exponentially.

The keys to a successful investment

The first key is to improve the property. The more desirable your property is, the more value it will generate and therefore demand.

While many profit centers trigger themselves over time and increase property value and rents, you can also make changes to your property to increase its appeal and accelerate the growth of those profits.

The easiest way to improve a property is to renovate it. When you improve a property, making it more pleasant and attractive, you not only increase the overall value of that property, but you can also command higher rents.

Another more financial option is to refinance your mortgage. Mortgage interest rates fluctuate, just like real estate and rents.

If the interest rate falls below what you originally signed up for, you can refinance the property at that lower interest rate.

Of course, there's no guarantee that rates will drop, but if they do, you can make that decision and increase your cash flow.

Another fundamental key is choosing the right location. This is certainly not the first time you've heard the word location in relation to real estate.

Analyze neighborhoods and identify areas with a chance of appreciation.

Of course, focusing specifically on gentrification, as with any assessment, is speculative.

Not only do you want to learn how to identify areas that are likely to experience gentrification, but you also need to have a contingency plan in place in case gentrification doesn't happen.