The Impact of Interest Rates on Investment Property Financing

Interest rates have a profound impact on various aspects of investment properties and investor financing options.

Real estate investors must be able to understand this impact because it directly influences the financial viability and success of their investments. 

What's in this article?

How do interest rates impact investment property financing?
Investment property financing options
Current interest rate trends
How investors can influence their interest rate
Compass Mortgage matches investors with the perfect investment property financing option and competitive interest rates

In this article, we will take a look at how interest rates impact investment property financing, current interest rate trends and financing options in today’s market.

How do interest rates impact investment property financing?

Interest rates directly affect affordability, cash flow, property values and more.

Investors who successfully navigate the relationship between interest rates and their investment properties can make informed decisions about market conditions, helping them strategize the timing of acquisitions and exits.

Let’s take a look at the factors at play when it comes to interest rates and investment property financing.

Financing costs

In a lower-rate environment, investors can secure financing at a more favorable rate, resulting in lower monthly mortgage payments and decreased overall financing expenses.

In a higher-rate environment, investors face higher monthly mortgage payments and higher overall borrowing costs.

To combat higher rates, real estate investors must choose their investments and their mortgage lender wisely.

The right lender will serve more as an investment partner who can help investors navigate their loan options and secure the most affordable financing option for their unique scenario.

Affordability, demand and occupancy

Higher interest rates make it more difficult for borrowers to afford a home, but the impact on investors can potentially be positive as well.

Here’s a simple example of the impact of interest rates on affordability: The monthly loan payment for a $300,000 home is $1,779 at a 5.9% interest rate and $2,180 at a 7.9% rate.

That is a difference of $401 per month—not including taxes and fees.

Affordability impacts real estate investors in two main ways:

  1. Investors may find it more challenging to find an investment property that fits their budget and goals
  2. Homebuyers who can’t afford a home will need to rent

While a higher rate environment decreases homebuyer demand, it can boost the demand for quality rental properties.

There will always be a need for rental properties whether rates are high or low, but higher interest rates can be an opportunity for investors to attract more occupants.

Cash flow and ROI

Increased demand in rental properties allows lenders to raise rental rates, which boosts cash flow and the return on investment (ROI).

On the other hand, investors will have a higher mortgage payment in a high-rate environment, so they must evaluate the impact of their payment on cash flow and adjust their rent and expenses accordingly.

Property values

Higher rates typically push down property values because fewer people are buying properties.

However, the current market is different because of the lack of home supply.

Higher rates combined with a lack of home supply have led to sustained demand, which has contributed to elevated property values.

As a result, investors still have opportunities to maintain or boost a property’s value if they can secure the right investment and make the necessary improvements.

Additionally, fix-and-flip investors can make a considerable profit in a seller’s market where demand exceeds supply.

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Investment property financing options

Depending on an investor’s goals, there are investment property financing options available in any type of market.

Let’s take a look at the range of options Compass Mortgage offers to real estate investors.

Conventional loan

A conventional loan is the most common type of purchase or refinance loan.

Conventional loans offer borrowers various term lengths and rate structures, including fixed or adjustable interest rates and lower rates with a higher credit score.

Borrowers also can leverage the cash-out refinance option to use the equity in an existing property for the purchase of their next property.

DSCR loan

DSCR loans are the ultimate investment property financing option in today’s market because borrowers can qualify based on the property’s income potential rather than their finances.

This distinction offers greater flexibility to investors and requires the potential property to have a healthy cash flow that covers its debt obligations.

Investors also have access to higher loan amounts.

FHA and VA loans

Investors can use an FHA or VA loan to purchase an investment property, but they must also plan to live in one of the units to qualify.

The benefits of these government-backed loans include lower down payment amounts and lower credit score requirements.

Additionally, VA loans are only available to eligible veterans, active-duty service members and surviving spouses.

Home equity loans and home equity lines of credit

Real estate investors can leverage the equity in an existing property with a home equity loan (HEL) or home equity line of credit (HELOC).

The funds can be used for any purpose, such as a down payment on a new investment property or to make upgrades or improvements on a property.

Experts predict that interest rates should begin to slowly descend in the coming year, but may remain elevated.

Despite the current rate environment and trends, real estate investors have numerous opportunities available.

Rental demand is expected to remain high as homebuyers wait for rates to fall into an affordable range. Demand in cities also is expected to increase.

How investors can influence their interest rate

Many of the factors influencing interest rates are out of the borrower’s control, but the following strategies can help keep financing costs as low as possible:

  • Boost your credit score to access more favorable rates and terms
  • Make a significant down payment to reduce the loan amount
  • Work closely with a trusted mortgage lender to choose the best loan type and terms for your specific investment scenario

In a rapidly evolving market, investors must work to stay ahead and stay informed by maintaining strong relationships with other real estate professionals and attending industry events.

Compass Mortgage matches investors with the perfect investment property financing option and competitive interest rates

The experienced loan officers at Compass Mortgage will be your partner and advocate throughout every step of the process. 

With us, you’ll find financing offered with a personal touch. 

Start the loan process today by providing our team with information about your investment.

We look forward to helping you discover the most affordable financing option.