Should you invest in SFR rental properties as interest rates continue to rise?

Posted by Residential Capital Partners on Oct 24, 2022 4:06:03 PM


Rising interest rates and inflation shouldn’t deter you from acquiring long-term rental properties.

In the current market, it can be difficult to determine whether now is the right time to acquire long-term rental properties. Interest rates are still on the rise. According to Bank Rate, the current average rate for a 30-year fixed mortgage is 7.04%, up 12 basis points since September 30, 2022. While inflation appears to be leveling out on some fronts, the buying power of average American families cannot withstand the high cost of money today. This is forcing many Americans to step back and assess the feasibility of buying a home right now.

So, why is it still the right time for the SFR investor to acquire long-term single-family rental properties?


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Reality, Demand & Timing

There is a new reality in place for the SFR Seller. Cap rate decompression. For the past 12-14 years, cap rates have gone the way of interest rates – down and to the right (compression). But, with every Fed meeting over the past 12-14 months, cap rates have been going up and to the right (decompression). What once was a 5% cap is now an 8% cap, a 9% cap, and a 10% cap. Rising interest rates have forced SFR Sellers to accept this new reality. An advantage for the SFR Buyer.

Demand for single-family rental properties increases with every interest rate hike instituted by the Fed. With each interest rate increase, buying power for the average American family decreases. The solution? Rent vs. own. Occupy the American Dream. While the affordable housing shortage remains in America “as an owner,” the demand for affordable housing “as a renter” is as strong as ever. Another advantage for the SFR Buyer.

For those long on SFR rental properties, now is the “time” to “time the market.” Cap rates are up. Demand is up. Even if interest rates are up, a SFR investor with a long-term outlook should be able to withstand a higher fixed rate on a 30-year rental loan. What goes up, must come down. Lock in the best rate possible on a 30-year DSCR SFR rental loan and wait for the market to calm down. Once it settles, you can either continue to meet your DSCR coverage given the opportunistic buy you made or refinance and improve your cashflow position in your SFR property down the road. Timing is everything. Again, an advantage of being a SFR Buyer.


Still on the fence? Learn more about SFR investments.




Topics: Investment Property Strategies, Single family rentals