How Are Rising Interest Rates Affecting Rental Rates?

The Federal Reserve has aggressively raised interest rates in 2022 in an effort to combat red-hot inflation. Interest rates play a significant role in determining the cost of borrowing money. So when these rates rise, buying property becomes increasingly expensive. But how do higher interest rates affect the rental market? Do rental rates rise along with interest rates? Or do rents fall as borrowing money becomes more expensive? As it turns out, local conditions play a critical role in determining the answers to these questions.

Do Rising Interest Rates Drive Rents Higher?

There are several reasons why higher interest rates could drive rent prices up in Portland.

Borrowing Becomes More Expensive

Higher interest rates could increase rental rates because they increase the cost of borrowing money for landlords and property developers. When interest rates rise, it becomes more expensive for landlords and developers to take out loans to finance the construction or acquisition of new rental properties. As a result, they will likely pass on these higher borrowing costs to tenants in the form of higher rent prices.

Demand for Rental Units Could Increase

Another reason is that rising interest rates can affect the demand for rental properties. When interest rates rise, it increases the cost of borrowing money for home buyers. Even a relatively small mortgage rate increase can lead to dramatically higher monthly mortgage payments. According to Yahoo Money, mortgage rates have risen four percentage points since the start of the year, the most significant year-to-date increase in over 50 years. The national median monthly payment also increased by 3.7% to $2,012 in October from $1,941 in September, which is a new record. With home buying becoming increasingly unaffordable, many Americans may choose to continue renting rather than buying a home, leading to fewer available units on the rental market.

The Rental Unit Supply Could Drop

In addition, rising interest rates can also impact the supply of rental properties in the Portland metropolitan area. When interest rates rise, it may become less financially viable for landlords and developers to invest in new rental properties. This can lead to a decrease in the supply of rental properties, which can drive up rent prices due to increased competition for available units.

The Overall Cost of Living Goes Up

Furthermore, rising interest rates can also impact the overall cost of living. As interest rates rise, the cost of borrowing money for other expenses, such as mortgages, car loans, and credit card debt, may also increase. This can lead to an overall increase in the cost of living, which can put pressure on renters to pay higher rent prices in order to afford these other expenses.

Local Conditions Play a Significant Role

It is worth noting that the impact of rising interest rates on rent prices can vary depending on the specific circumstances of the rental market. For example, if the demand for rental properties is high and the supply is limited, landlords may be able to raise rent prices even if interest rates are rising. On the other hand, if the demand for rental properties is low and the supply is abundant, landlords may be more likely to lower rent prices in order to attract tenants.

In some areas of Portland, we see the second scenario playing out. Rising interest rates have made home ownership unaffordable for many Portlanders, negatively impacting the buying market. Consequently, existing homeowners who want to sell cannot find buyers. Instead of staying in their home or leaving it empty, they’re turning those homes into rentals and flooding the market with new units. This increased supply has caused rental rates to fall in some Portland neighborhoods.

Setting Rental Rates is Challenging

Overall, rising interest rates can significantly impact rent prices in the Portland metropolitan area by increasing the cost of borrowing money for landlords and property developers, affecting the demand for rental properties, and impacting the overall cost of living. It is essential for both landlords and tenants to be aware of these potential impacts and to consider the long-term financial implications of any rental agreements carefully.

Do-it-yourself landlords often struggle with setting appropriate rental prices under even ideal economic circumstances. We often see these investment owners charging much less than the market would indicate, meaning they lose out on significant revenue over the life of their investment ownership. Under challenging economic conditions like we’re currently facing, DIY landlords often don’t recognize when they need to reduce their rental rates to compete in a changing market.

Ultimately, landlords who set their own rents often fall outside the ideal market rate, leading to two potential outcomes. First, they continuously miss out on revenue because they charge too little. The second outcome is that they face increased vacancies and lost income because they’ve set their rental rates too high. This is where the support of professional property managers becomes particularly valuable.

Partner With Professional Property Managers

Professional property managers, like Rent Portland Homes by Darla Andrew, understand local market conditions. They track trends every day on the neighborhood level and use that information to optimize rental rates for all their clients. As a result, you’ll no longer have to guess when setting rental rates. Instead of an arbitrary rental strategy, professionals will use market data to set rates and incorporate regular increases, so you’re continuously optimizing your investments. But that’s not all.

Excellent property managers will also help you attract and screen potential tenants, place them in your home, and handle regular maintenance and repair tasks. They’ll also collect monthly rent payments and deal with the day-to-day needs of your tenants. All that’s left is for you to sit back and enjoy the returns on your hard-earned investment. If you’d like to learn more about how we can help, contact us today at 503.515.3170 or fill out the contact page on our website, and we’ll get in touch with you immediately.