Higher interest rates have changed the economics of owning and buying rental property in Phoenix.
For investors buying today, higher borrowing costs make it harder for properties to generate attractive cash flow. For existing owners, however, higher rates can actually make an older low-rate mortgage more valuable.
The important question isn't simply whether interest rates are high. It's how your financing, property economics, equity, and long-term investment goals fit together.
Quick Answer: How Do Higher Interest Rates Affect Rental Property Owners?
Higher interest rates make new rental property purchases more expensive to finance and can reduce monthly cash flow. At the same time, they make existing low-rate mortgages more valuable and can give current owners another reason to hold rather than sell.
For rental property owners, the decision should not be based on the mortgage rate alone. A low interest rate is valuable, but it doesn't make an otherwise poor rental property a good investment.
Higher Rates Make New Rental Property Purchases Harder to Pencil Out
Interest expense is one of the largest costs for a leveraged real estate investor. When mortgage rates rise, the monthly payment on the same property can increase substantially.
As of September 24, 2026, Freddie Mac reported an average 30-year fixed mortgage rate of 7.03%. Investment-property financing can differ from conventional owner-occupied mortgage rates, but the broader increase in borrowing costs helps illustrate the challenge investors face.
Consider a simplified example.
A $300,000, 30-year mortgage at 4% has a principal-and-interest payment of approximately $1,432 per month.
At 7.03%, the payment is approximately $2,002 per month.
That's about $570 more each month for the same amount borrowed—before considering property taxes, insurance, HOA fees, maintenance, vacancy, or property management.
That difference can turn a property that once produced attractive cash flow into one that doesn't pencil out nearly as well.
In our experience in the Phoenix market, investors tend to become less active when financing becomes more expensive. There are still good investment properties, but buyers generally have to be more selective.
Phoenix Investors Have to Look Beyond the Mortgage Payment
Financing costs are particularly important in a market where rents haven't necessarily risen at the same pace as borrowing costs.
As of August 2026, Zillow reported a typical Phoenix home value of approximately $405,700 and an average rent of approximately $1,574. Those figures shouldn't be used to evaluate an individual property—rents and values vary considerably by neighborhood and property type—but they help illustrate why finding strong cash-flowing acquisitions can be challenging when financing is expensive.
That doesn't necessarily mean a property is a poor investment.
It means investors need to evaluate the entire return.
Rental Property Returns Can Come From Four Places
Cash flow is important, but it isn't the only potential financial benefit of owning rental property.
An owner's overall return can potentially come from four primary sources:
- Cash flow: Rental income remaining after operating expenses and financing costs.
- Mortgage paydown: Each principal payment reduces the loan balance and builds owner equity.
- Appreciation: The property may increase in value over a long holding period, although appreciation is never guaranteed.
- Tax benefits: Rental real estate can provide depreciation and other potential tax benefits depending on the owner's circumstances.
Under the IRS General Depreciation System, residential rental buildings are generally depreciated over 27.5 years. Tax treatment varies by investor, so owners should discuss their individual circumstances with a qualified tax professional.
We've seen properties that don't appear particularly impressive when evaluated on monthly cash flow alone but look considerably different when principal reduction, potential appreciation, and tax benefits are included.
That doesn't mean investors should use those benefits to justify a property with poor underlying economics. It means cash flow should be considered as one part of the investment rather than the only measure of return.
A Low Mortgage Rate Can Be a Valuable Asset
Higher interest rates have created an interesting situation for owners who purchased or refinanced when mortgage rates were much lower.
Imagine owning a Phoenix rental with a long-term fixed mortgage at 3% or 4%.
Selling that property doesn't just mean selling the house. It also means giving up financing that could be difficult or impossible to replicate today.
Economists sometimes refer to this as the mortgage lock-in effect. Federal Reserve research has found that the widening gap between existing homeowners' mortgage rates and prevailing market rates significantly reduced homeowner mobility after interest rates increased.
We see the same consideration when talking with rental property owners: an attractive existing mortgage can be a meaningful reason to continue holding a property.
But there is an important distinction.
A Favorable Mortgage Doesn't Necessarily Mean You Have a Favorable Property
This is one of the most important points for rental property owners to understand.
A good mortgage and a good investment are not the same thing.
We generally recommend that owners think carefully before giving up favorable long-term financing. But we wouldn't recommend keeping an unfavorable property simply because the mortgage rate is low.
An owner should still consider:
- Current and realistic future rental income
- Vacancy
- Maintenance and repair costs
- Property taxes and insurance
- HOA expenses
- Upcoming capital improvements
- Current property condition
- Equity tied up in the property
- Long-term prospects for the property
- How the investment fits the owner's financial goals
A property with a 3% mortgage could still be a poor investment.
Likewise, a property purchased with more expensive financing could still be a good investment if the purchase price and underlying economics make sense.
The mortgage should be part of the decision—not the entire decision.
Low Mortgage Rates Are Also Creating Accidental Landlords
The same dynamic affects homeowners who never intended to become real estate investors.
Someone who purchased or refinanced a Phoenix home when mortgage rates were much lower may eventually decide to move. Selling the home means giving up the existing mortgage and potentially taking on much more expensive financing elsewhere.
Some homeowners decide instead to keep the property and turn it into a rental.
We've worked with many owners who became landlords because circumstances changed rather than because they originally set out to buy an investment property. A favorable mortgage can make that option even more attractive.
If you're considering keeping a former residence as a rental, our Phoenix Accidental Landlord's Guide explains how to evaluate the home as an investment and what to consider before becoming a landlord.
Can Buying When Interest Rates Are High Create an Opportunity?
Potentially.
Higher rates make financing more expensive, but they can also reduce competition from other buyers and investors.
There is also an important difference between paying a high interest rate and paying too high a price for the property.
If an investor buys a good property at an attractive price with an expensive mortgage, there may be an opportunity to refinance if rates decline in the future.
If an investor overpays for the property, there is no equivalent solution.
You can potentially refinance an expensive loan. You can't refinance away an excessive purchase price.
That doesn't mean an investor should buy a property today assuming that lower rates will eventually make the deal work. Interest rates may remain elevated, refinancing has costs, and future financing terms are impossible to know.
The property should make economic sense based on reasonable assumptions today. A future refinancing opportunity should be considered potential upside—not the investment strategy.
Higher Homeownership Costs Can Support Rental Demand
Interest rates also affect rental property owners from the demand side.
When mortgage rates rise, the monthly cost of purchasing a home generally rises with them. Some households that might otherwise purchase a home may continue renting longer.
That can support rental demand.
National Zillow data from August 2026 showed rents rising faster year over year than home values, while elevated mortgage rates were keeping some prospective buyers on the sidelines.
There are many other factors affecting Phoenix rents, however, including new housing supply, employment, population growth, seasonality, and the number of competing rentals available.
Higher mortgage rates don't guarantee rising rents.
They are simply one factor that can influence the decision between renting and buying.
Inflation Can Benefit Owners With Fixed-Rate Debt
Rental property can also behave differently from some investments during an inflationary environment.
Over long periods, inflation can contribute to higher rents and property values. At the same time, the principal balance of a conventional fixed-rate mortgage doesn't increase with inflation.
In other words, the dollars used to repay that debt in the future may be worth less in real terms than the dollars originally borrowed.
That can be beneficial to owners who hold quality properties with long-term fixed-rate financing.
But again, inflation doesn't rescue a bad investment. Property-specific economics still matter.
What We Recommend to Rental Property Owners
If you already own a Phoenix rental property with a favorable mortgage, don't give up that financing casually.
Instead, evaluate the entire investment.
Look at the property's current cash flow, realistic market rent, expenses, equity, condition, expected future capital needs, long-term prospects, and how it fits your overall investment goals.
Then consider the mortgage as another valuable component of that investment.
We generally favor keeping attractive long-term financing when the underlying property also makes sense to own.
The second half of that sentence is important.
Don't keep an unfavorable property simply to keep a favorable mortgage.
Should You Keep or Sell a Rental Property With a Low Mortgage Rate?
There isn't a universal answer, but owners can make a better decision by asking several questions.
What is the property actually earning?
Calculate realistic rental income and account for vacancy, maintenance, management, insurance, taxes, HOA expenses, and future capital expenditures.
How valuable is your existing financing?
Compare your current mortgage with the financing that would likely be available if you sold and purchased another investment.
How much equity do you have in the property?
A rental can have positive cash flow while still producing a relatively low return on the equity tied up in it.
What major expenses are coming?
An aging roof, HVAC system, pool, or other significant component can materially change the investment outlook.
Would you buy this property today?
This can be a useful thought exercise. If you already own the property, it's easy to focus on what you paid years ago. Instead, consider whether the property's current economics and future prospects still justify keeping your equity invested there.
Does the property still fit your goals?
Your investment objectives may have changed since you purchased it.
The right answer depends on the combination of the property, financing, equity, tax considerations, and owner's objectives.
Frequently Asked Questions
Should I sell a rental property if I have a low mortgage rate?
A low mortgage rate can be a valuable reason to continue holding a rental property, but it shouldn't determine the decision by itself. Evaluate the property's cash flow, equity, condition, future expenses, long-term prospects, and your investment objectives. A favorable mortgage is most valuable when it's attached to a property that still makes sense to own.
Is it a bad time to buy rental property when interest rates are high?
Not necessarily. Higher rates make it more difficult to find properties with attractive cash flow, but they can also reduce competition among buyers. Investors should evaluate properties using today's financing costs rather than depending on rates falling later. If rates eventually decline, refinancing may provide additional upside.
Do higher interest rates increase rental demand?
They can. Higher mortgage rates increase the monthly cost of purchasing a home, which can cause some households to remain renters longer. Rental demand is also influenced by employment, population, housing supply, rents, home prices, and local economic conditions.
Is cash flow the only return from rental property?
No. Rental property returns can potentially come from cash flow, mortgage principal paydown, appreciation, and tax benefits such as depreciation. Investors should consider all four while avoiding assumptions that appreciation or tax benefits will compensate for fundamentally poor property economics.
Should I keep my home as a rental because I have a low mortgage rate?
A favorable mortgage can make converting a former residence into a rental more attractive, but first evaluate the home as an investment. Estimate realistic rent, operating expenses, vacancy, maintenance, future capital expenses, equity, and tax implications before deciding. Our Phoenix Accidental Landlord's Guide provides a more detailed framework for making that decision.
Interest Rates Matter, But the Property Matters More
Higher interest rates have clearly changed rental property investing in Phoenix.
They've made new acquisitions harder to finance and made many existing low-rate mortgages considerably more valuable to their owners.
But interest rates are only one piece of the investment.
A strong rental property combines reasonable economics, appropriate financing, sustainable expenses, rental demand, and long-term potential. The goal isn't simply to own the cheapest mortgage possible.
It's to own a property that makes sense as an investment.
If you own a rental property in the Phoenix area and are deciding whether to keep it, sell it, or improve its rental performance, Rentals America can help you understand its current rental potential and what professional management would look like.
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