One of the primary advantages available to rental property investors in Tunisia is the fixed-rate mortgage over 25 years. It is surprising to note that this type of loan is quite unique compared to what is typically offered in other countries.
Most countries tend to offer adjustable-rate, floating, adaptable, or negotiable mortgages, all of which carry inherent risk due to the possibility of an unexpected increase in interest rates during the property’s ownership period. Not only are fixed-rate mortgages excellent for helping investors avoid these unexpected rate hikes, but there have been notable periods when interest rates on these mortgages have been extremely low, making the cost of borrowing almost negligible.
However, what happens when interest rates rise to levels we are not accustomed to? Suddenly, monthly mortgage payments are significantly higher, impacting the yield of our cash flows. Does this mean it’s time to slow down or stop investing in rental properties? How can you counter the rise in interest rates on your mortgage to remain profitable with your rental investment?
The best way to address this question is to understand how rental properties generate income, the factors you can control in a rental property, and what to look for in a potential rental property to give you the best chance of success, despite a higher mortgage payment.
- I-Rental properties are the subject of long-term investments.
- II-How does a rental property generate income?
- III-Increase in rental income.
- IV-How to increase rental income and reduce expenses associated with a rental property?
I-Rental properties are the subject of long-term investments.
One of the primary considerations regarding rental properties is that they are essentially long-term investments. While it’s true that you can achieve quick profits through improvement projects or an increase in the property’s value, and you may also secure deals that provide significant cash flow from the outset, it is generally advisable to bear in mind that rental properties are most profitable in the long term.
II-How does a rental property generate income?
Before familiarizing yourself with real estate investment, you may have been aware that rental properties can be highly profitable, but you might not have necessarily understood how they could be so. There are five ways in which rental properties can generate income:
- Cash flow
- Appreciation
- Tax benefits
- Equity growth through mortgage repayment
- Protection against inflation
As you delve into the details of each of these profit centers, you will not only become more informed about the advantages of holding a rental property for the long term rather than the short term, but you will also begin to realize that incurring a slightly higher interest rate than you are accustomed to may not outweigh the profit potential over the lifespan of the rental property.
III-Increase in rental income.
Indeed, the projected cash flow of a rental property is based on today’s rents rather than those of tomorrow. Rental income increases for two reasons: appreciation and inflation. What does not increase over time and is not affected by appreciation or inflation is your monthly fixed-rate mortgage payment.
This implies that your cash flow margin will continue to expand over the lifespan of your rental property as you raise rents. While expenses such as property taxes and insurance may increase over time, it is unlikely that they will escalate at a rate comparable to the increase in rents.
Overall, you will observe that rents progressively diverge from your fixed-rate mortgage payments, and your profits will continue to grow exponentially.
IV-How to increase rental income and reduce expenses associated with a rental property?
There are proactive measures you can take to accelerate the growth of your equity. Let’s review them:
- Property Enhancement: The more attractive your rental property, the more value it generates and the higher the demand. The simplest way to enhance a property is through renovation.
- Choosing the Right Location: You’ll notice that the importance of a rental property’s location has been emphasized before. Opt for a high-demand area to ensure appreciation potential, and take even more strategic steps by learning how to analyze neighborhoods and identify areas where the chances of appreciation are extremely high.
- Factors such as gentrification, population growth, and employment growth can contribute to increasing the value of your rental property.
These proactive steps can significantly contribute to a faster growth of your equity in the long run.
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