How do I underwrite a real estate investment deal with a higher interest rate?

To underwrite effectively at higher interest rates, model your deal at slightly higher than the quoted rate (ex: 7.5% for 7% rate) to account for rate fluctuations. Analyze cash flow, loan constants, and DSCR at those higher rates to ensure your deal holds up even if borrowing costs rise before closing.

What is stress testing in real estate underwriting?

Stress testing involves modeling your deal’s performance under less favorable financial conditions, such as higher interest rates, vacancy, or expense growth. In today’s market, it’s smart to test scenarios at .5%–1% higher interest rate than the actual rate to understand how rate shifts may impact profitability and refinancing outcomes.

Why should I factor in rising insurance and property taxes when underwriting?

Insurance premiums and property taxes have increased in many markets due to inflation, natural disasters, and tighter municipal budgets. Conservative underwriting assumes 8–12% annual increases in these costs unless local caps apply, helping prevent future cash flow shortfalls.

How do higher interest rates affect my exit strategy in real estate?

Higher rates can lead to lower loan proceeds, higher debt service, and softer cap rates. If you plan to refinance or sell, underwrite with conservative assumptions (such as flat cap rates and lower LTVs (65%–70%)) to avoid overestimating your exit returns.

Is it still a good time to invest in real estate with higher interest rates?

Yes – if you underwrite deals conservatively and focus on fundamentals. While higher rates impact borrowing costs, they also reduce competition and compress asset prices in some markets. Investors who adapt their models and pursue deals with strong cash flow, value-add potential, or long-term upside can still achieve solid returns in today’s environment.

How to Underwrite Real Estate Deals at 7%

For much of the 2010s and early 2020s, real estate investors enjoyed historically low interest rates. Borrowing costs were often below 4%, creating a tailwind for asset appreciation, cash flow, and refinancing flexibility. Underwriting deals was simpler, and margin for error was wider.

But as of mid-2025, we’re in a fundamentally different lending environment.

The average 30-year fixed mortgage rate has hovered around 6.8% since early May 2025, according to the Freddie Mac Primary Mortgage Market Survey (PMMS). And based on current economic indicators, there is no compelling evidence that rates will return to pre-2022 levels.

As an investor, this isn’t cause for alarm – it’s a call for adjustment.

The New Reality: Rates Have Reset, Not Temporarily Spiked

Freddie Mac’s September 4, 2025, report shows the average U.S. 30-year fixed mortgage rate at 6.5%, far above the 2.78% average recorded in July 2021.

The Federal Reserve has maintained its target rate between 4.25% and 4.5%, and while inflation has moderated, Fed officials have repeatedly signaled they are in no rush to cut rates substantially.

How to Underwrite Deals at 7% With Confidence

Smart investors are not sitting on the sidelines waiting for a rate reversal. Instead, they are recalibrating their underwriting to reflect today’s cost of capital.

1. Stress-Test at Higher Rates

Don’t base your buy box on the current rate alone. Underwrite your deal at +50 to +100 basis points above the quoted rate (e.g., model at 7.0%–7.5% even if your rate is 6.5%).

This helps protect against:

Delays in closing or rate lock expirations
Market-driven lender repricing
Refinancing under less favorable terms

This kind of rate sensitivity modeling is especially critical if you’re considering bridge-to-perm financing strategies or value-add repositioning.

2. Account for Rising Insurance and Tax Burdens

Insurance costs have surged across many markets due to climate risks, supply chain challenges, and reinsurance pricing shifts.

Similarly, property tax reassessments are becoming more common in appreciating markets, particularly in states with shorter reassessment cycles. Build in an annual 8%-12% increase in taxes and insurance unless capped by local regulations.

3. Reevaluate Exit Assumptions

If your hold strategy includes refinancing, don’t assume a rate much lower than your entry rate. Instead, underwrite for:

Flat or slightly higher cap rates
Interest rates in the 6.5%–7.5% range
Lower-than-historical LTVs (65%–70%) to account for tighter lending standards

If rates fall, your DSCR and equity positions will benefit, but don’t build your business model on that assumption.

Adapting vs. Waiting

It’s natural for investors to feel cautious in a higher-rate environment. But the historical data is clear: returns in real estate often accrue to those who act when others hesitate.

By adopting more conservative, rate-proof underwriting practices, you can identify deals that actually work in today’s environment, not just hypothetically in a more favorable one.

Rate-Proof Your Strategy: How to Underwrite Real Estate Deals at 7%