By Tyler Barry, Acquisitions Analyst
Interest rates are still among the first things investors ask about when evaluating rental properties. After years of extremely low borrowing costs, today’s rate environment has forced everyone to slow down and rethink how deals are analyzed.
Higher rates do not mean rental investing is broken. They do mean that deals need to be evaluated differently than they were a few years ago. The margin for error is smaller, and being selective matters more than ever.
Here’s how I look at interest rates today when I’m underwriting rental deals and deciding which ones actually make sense to pursue
How Higher Interest Rates Are Really Impacting Deals
Higher interest rates increase monthly debt service. When you combine that with the appreciation we saw over the last several years, it means investors can no longer assume a deal will cash flow simply because it would have worked in a low-rate environment.
A few years ago, it was possible to buy an average property and rely on cheap debt to make the numbers work. That’s no longer the case. Today, you can’t select a property at random and expect it to perform after financing.
Because of this, due diligence is more important than it has been in a long time. I spend far more time pressure-testing assumptions now than I did when rates were under 3 percent.
Having a clearly defined real estate buy box helps eliminate deals that only work under ideal conditions.
Are Rental Deals Still Penciling?
Yes, but not everywhere.
We’re still seeing deals pencil in markets where rental demand continues to outpace supply. This is especially true in areas with limited new construction inventory coming online or where population and employment fundamentals remain strong.
In those markets, rent stability helps offset higher financing costs. That stability becomes more important when debt service is less forgiving.
That’s also why I often see new construction rentals perform better than resale properties in today’s environment. Lower maintenance costs and more predictable operating expenses reduce downside risk.
Common Mistakes Investors Make When Thinking About Rates
One of the biggest mistakes I see is assuming today’s interest rates are temporary.
Some deals are being structured with interest-only periods or large balloon payments based on the belief that refinancing at much lower rates will be easy in a few years. That’s a risky assumption.
Three percent mortgage rates are unlikely to return anytime soon. Anyone underwriting a deal today should stress-test it to make sure it still works if current rates stick around for several years.
Focusing only on the interest rate, instead of the full deal structure and exit risk, can quickly lead to overleveraging.
What Matters More Than Rate Alone
At this point in the cycle, due diligence matters more than the rate itself.
We can’t control interest rates, but we can control where we buy and what we buy. I consistently see lenders offer better terms for stabilized properties with verifiable financials because those deals carry less risk.
Underestimating the cost or timeline to stabilize a property can completely change the outcome when rates are higher. Unexpected repairs, vacancy, or lease-up delays are much harder to absorb when debt service is elevated.
This is why we focus heavily on underwriting assumptions and downside scenarios.
A Real Example From a Recent Deal
We recently worked with an investor evaluating two properties in the same market. One was fully stabilized with clean, verifiable financials. The other had upside potential but required lease-up and operational improvements.
The lender offered a full point lower interest rate on the stabilized property.
That difference alone materially changed the long-term return and risk profile. Even though the purchase prices were similar, the stabilized property came with better financing and more predictable performance.
In today’s environment, stability is often rewarded more than potential.
Why Capital Is Starting to Move Again
As rates begin to ease, yields on bonds and high-yield savings accounts are coming down. Investors who parked capital over the last few years are starting to look for other places to put it to work.
Real estate is one of the asset classes those investors are returning to, particularly stabilized rental properties with reliable income. Higher interest rates have slowed speculative buying, but they have also pushed more capital toward disciplined, cash-flow-focused strategies.
Bottom Line
Higher interest rates have changed how rental deals work, but they haven’t eliminated opportunity. The deals that still perform are the ones built on realistic assumptions, conservative leverage, and stable fundamentals.
Rates matter, but they are only one part of the equation. Deal selection, underwriting discipline, and long-term stability matter more now than they have in years.
Want Help Evaluating a Rental Deal?
If you’re reviewing a potential rental property and want a second opinion on the numbers, we’re happy to take a look.
Use the form below to share a property or outline your investment goals, and we can help you assess returns and risk in today’s interest rate environment.
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