Record-low mortgage rates have made real estate more attractive for every generation, but with so many other economic uncertainties, is now the right time to plunge into the real estate market?
With the economy in a recession due to the coronavirus and millions of people unemployed, it might be the right time to make moves. But low interest rates aren’t always sunshine for buyers. While low rates make properties attractive, sellers may also raise their asking price to capture some of the value created by low rates.
There are a few things to consider before you embark on your real estate investing journey. Each of these should help you determine whether it’s a good time to jump into real estate.
Low mortgage rates may make a property more affordable in the beginning, but they may also send house prices soaring. Sellers often capitalize on the interest rates to raise their prices. This effect may be compounded by low inventory in some areas, making buyers scramble for the available properties.
Here’s some quick math, take a $100,000 30-year mortgage at 5 percent interest. The fully amortized monthly payment would come to around $537. With a rate at 3.5 percent, the new monthly payment would be $449. If you were simply refinancing that, you would capture all the value.
However, when sellers see that homes are more affordable due to low rates, they may raise their asking price. At a rate of 3.5 percent, the same buyer could now afford a $120,000 mortgage and pay about the same monthly payment ($539) as before at the higher rate.
Here sellers may account for lower rates by raising asking prices by up to 20 percent. Not only does the rise negate the lower mortgage rate, it also means the buyer must come up with more money down.
However, in the real world this process doesn’t happen right away, so buyers may still have time to get real value before the market fully reflects the effects of low rates.
Do your homework and make sure low interest rates aren’t pushing housing costs up.
There’s never a bad time to buy property. Especially if you’re looking to occupy it. Appreciation is a real thing and even if the market scales back, there’s still real opportunity to enjoy your home.
Part of why this works is that the market forces pushing up prices now rarely last long term. The housing market now responds to incentives, such as low supply, and adjusts. That said, real estate investors need to be looking at long-term trends, not just whether the market is hot today.
Investing in real estate could mean buying to occupy it or to rent it out. While it may seem moot, it’s important to think about your purchase and how it’s financed.
If you’re buying a property because you plan on living there, consider whether it makes sense to buy rather than rent. Will you be living in the area long term so that it makes sense to lock up your money in a down payment and pay the closing costs and other transaction fees? Many experts suggest that you have to occupy the property for at least seven or eight years for it to really start making sense to buy.
If you’re an owner-occupier, you’ll also want to consider how big a house you might need in the future. Will your family expand soon and require more space? It may make sense to buy a bigger house then you need now and lock in a low mortgage payment for years.
If you’re buying to rent out, your considerations are different. It’s about how much money the property can generate. So you need to understand the rental market as well as the expenses of maintaining the property. In addition, you’ll likely have to put more money down, often 25 or 30 percent, than if you were an owner-occupier, where 20 percent (or even less) is common.
Check for unemployment in the area you intend to rent out in. A high unemployment rate means more rent default and potential issues finding renters to begin with. It’s not an end-all metric, but something to consider when you’re looking to rent out your property.
Mortgage rates have been low for awhile now. In fact, the rates have never been lower.
Such low rates may make owning a house more affordable than renting one, depending on your circumstances. And with the mortgage likely being the single highest cost for a homebuyer, low rates are definitely going to drive purchases.
Low rates aren’t always a win though. There’s a double edged sword in the form of higher purchase prices as well. The lower the interest rates, the higher the price you’ll pay for your next home.
With all of this uncertainty, it’s difficult to know whether it’s a good time to invest in real estate or not. And it’s even harder to know what to invest in.
Real Estate is great but what if other options could get you to your financial goals? Some more aggressive options for those with the risk appetite, and some that provide less risk, and monthly residual income.
That’s where Saint Investments comes in. Our financial specialists leverage their experience to help you reach your financial goals. Whether it’s the monthly income from an income fund, or an investment in commercial real estate, Saint Investments has you and your financial goals in mind.