Record mortgage rates have made real estate more attractive, but with so many other economic uncertainties, is now the right time to dive into the real estate market?
“The age-old question of when to buy real estate is more frequently asked today than before the pandemic,” said David Tuyo, CEO of University Credit Union in Los Angeles. “As many Americans face jobs and economic uncertainty, near-historically low rates make home buying very attractive.”
With an economy in recession from the coronavirus and millions of people unemployed, some potential investors are wondering what they should do. And not all low interest rates are good news for buyers, either. While low rates can make a home affordable early on, sellers can also increase their asking price to capture some of the value created by the low rates.
This is just one of the things you will want to consider before investing in real estate.
6 things to watch out for when investing in real estate
1. Are you investing to occupy or rent?
Investing in real estate can mean buying to occupy it or to rent it out. It may seem like a trivial distinction, but it is important in how you view your purchase and how it is funded.
If you are buying a property because you plan to live there, consider whether it makes sense to buy rather than rent. Will you be living in the area for the long term so it makes sense to lock your money in a down payment and pay closing costs and other transaction costs? Many experts suggest that you need to occupy the property for at least seven or eight years for it to really start to make sense when you buy it.
If you are an owner-occupier, you will also want to consider the size of the house you might need in the future. Is your family going to grow soon and need more space? It may be a good idea to buy a house that’s bigger than what you need right now and have a low mortgage payment for years to come.
If you are buying to rent, your considerations are different. This is how much money the property can generate. You must therefore understand the rental market as well as the expenses of maintaining the property. Plus, you’ll likely need to put in more money, often 25 or 30 percent, than if you were a homeowner, where 20 percent (or even less) is common.
“Investors should be aware of unemployment in the area of their investment properties,” explains Tuyo. “You obviously want to bet that the tenants will be able to afford the rent as much as possible. If the property is in an area … deeply affected by the pandemic, this may not be a good room in the short term. “
“So far, everything is fine,” says Gary Beasley, CEO of Roofstock, a real estate platform based in Oakland, California. “Most landlords report rent collections largely in line with pre-COVID levels. “
Whichever path you take, you will want to know how much house you can afford.
2. Low mortgage rates
Mortgage rates are at historically low levels, and now some lenders are even offering 30-year mortgages of less than 3% for owner-occupied homes. It’s hard to see rates this low and not pull out your checkbook, if a house already makes sense to you.
Such low rates can make owning a home more affordable than renting, depending on your situation. And since the mortgage is probably the biggest cost to a homebuyer, the low rates are sure to spur buying.
But rates can also go down in either direction. If mortgage rates go up in the future – certainly a big “if” in the short term, as the Fed promised to keep rates low until 2022 – then it could hurt house prices. But with low rates making homes more affordable today, buyers may see a future rate hike as something to be concerned about when it does, if it ever does.
3. Houses are more affordable, or are they?
Low mortgage rates can make real estate more affordable initially, but they can also cause house prices to skyrocket, canceling out the effect of low rates. This effect may be compounded by low inventories in some areas, forcing buyers to scramble to find out which homes are still available.
For example, take a mortgage of $ 100,000 over 30 years at an interest rate of 5%. The fully amortized monthly payment would be approximately $ 537. With a rate of 3.5%, the new monthly payment would be $ 449. If you were just refinancing that, you would get the full value.
However, when sellers find that homes are more affordable because of the low rates, they may increase their asking price. At 3.5 percent, the same buyer could now afford a $ 120,000 mortgage and pay roughly the same monthly payment ($ 539) as before at the higher rate.
Here, sellers can explain lower rates by increasing asking prices by up to 20%. Not only does the increase offset the decrease in the mortgage rate, it also means that the buyer has to make more money available. However, in the real world, this process does not happen instantly, so buyers may still have time to get real value before the market fully reflects the effects of low rates.
Depending on the circumstances, low interest rates are not always the panacea they seem to be.
4. Beware of a hot market
“There’s never a bad time to buy a house, apartment or land,” says Jessica Levine, real estate broker with Douglas Elliman in the New York area. “Rates are at historic lows again, buyer sentiment is strong and the level of pent-up demand is currently quite high.”
More wary buyers – and those who don’t have to buy today – may doubt such claims, however. The market forces that drive up prices seldom last long because the housing market reacts to incentives, such as low supply, and adjusts. That said, real estate investors need to look at long term trends, not just if the market is hot today.
“Residential real estate is increasingly seen as a safe haven for investors and homeowners,” says Beasley. As key factors in the price hike, Beasley cites low rates, a shortage of inventory, the increased focus on a residence as working from home normalizes, and investor concerns about other real estate sectors such as offices and retail.
Yet despite economic uncertainties – tens of millions suddenly unemployed, for example – the market remains surprisingly robust, even if it depends on the area.
“Have the prices fallen dramatically? No, not at all, because there is still hope that things will improve, ”said Alina Trigub, managing partner at SAMO Financial, a real estate consultancy in the New York area.
“In Florida, prices have held up, but many other markets in the US are buyer’s markets, making this a good time to invest in real estate,” says Chris Franciosa, senior agent at Compass Real Estate in Delray Beach, Florida.
“In the Intermountain West, investors keep coming,” says Lee Gientke, managing partner at Pontifex Capital, a real estate developer in Boise, Idaho. “Investors typically move their money from coastal cities – San Francisco, Seattle and Portland – to less expensive, less regulated, and high quality of life intermountain states like Idaho, Montana and Utah. “
5. Check your financial situation and your ability to make payments
A big real estate investment requires a solid financial position. If you’re a homeowner, you’ll want to make sure you’re able to make the payments, while homeowners want enough money to make repairs and cover a mortgage, if a tenant isn’t able to afford it. pay the rent.
Tuyo suggests now is a good time to buy if you have job security and find a home you want.
However, even a temporary disruption in your income may not hold you back, says Françoise. “Lenders are aware of the gaps in employment and want buyers on temporary leave to know that this does not prevent them from qualifying for a mortgage,” he says.
But given the uncertainties, those looking to invest in real estate may be more careful with both how they finance a property and what type of property they buy.
“The most important lesson that potential investors can take from the COVID-19 quarantine is to be more careful in their use of leverage and to maintain higher cash reserves so that they are resistant to any type. tenant default problem, ”Gientke said.
In uncertain times, it’s a good idea to stick to areas that fall within your “circle of expertise,” says James Richman, CEO of JJ Richman, an asset manager. “It is much easier to understand the industries and areas in which you have been exposed rather than trying to decipher new and upcoming industries in which you may not have exposure and expertise in the past, ”he says.
6. Make passive investments in real estate
While many people hear the words “real estate investing” and think of high priced houses and apartments, there are many other ways that there are many other ways that investors can offer attractive returns. One of the most popular is being a passive real estate investor.
Such a passive investment includes the purchase of an interest in a real estate investment trust, or REIT, and using an online platform to invest. Both approaches avoid the headaches of owning and managing physical property, and they offer other benefits as well.
For example, for investing in a publicly traded REIT you can start with as little as $ 20 or $ 30, depending on the price of the REIT. There are no commissions on the negotiation of your investments, unlike the substantial fees for real estate. Plus, investments are generally incredibly liquid and typically pay regular quarterly dividends, without you having to manage a property in any way.
At the end of the line
Despite the uncertainties created by the economic climate and the coronavirus, real estate may still prove to be an attractive investment today, in part due to historically low rates. But remember that a large part of the value of investing in real estate is in the long term, owning a property and allowing time to grow your investment. Investors looking to make a short-term score are often disappointed.
Featured image Ariel Skelly from Getty Images.