Record-low mortgage rates have made real estate more attractive, but with so many other economic uncertainties, is now the right time to plunge into the real estate market?
“The age-old question of when to buy real estate is being asked more frequently now than pre-pandemic,” says David Tuyo, CEO of University Credit Union in Los Angeles. “As many Americans are faced with employment and economic uncertainty, near-historic-low rates make home purchases very appealing.”
With the economy in a recession due to the coronavirus and millions of people unemployed, some potential investors are wondering what they should do. And low interest rates are not all good news for buyers either. While low rates may make a property affordable at first, sellers can also raise their asking price to capture some of the value created by low rates.
That’s just one of the things you’ll want to consider before you invest in real estate.
6 things to watch as you’re investing real estate
1. Are you investing to occupy or rent out?
Investing in real estate could mean buying to occupy it or to rent it out. That may sound like a trivial distinction, but it’s important in how you think about your purchase and how it’s financed.
If you’re buying a property because you plan to live there, consider whether it makes sense to actually 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.
“Investors need to be aware of the unemployment in the area of their investment properties,” says Tuyo. “You obviously want to hedge your bets that tenants will be able to pay rent as much as possible. If the property is in an area… deeply impacted by the pandemic, it might not be a good short-term play.”
“So far, so good,” says Gary Beasley, CEO at Roofstock, a real estate platform based in Oakland, California. “Most owners are reporting rent collections largely in line with pre-COVID levels.”
Regardless of which path you go, you’ll want to know how much house you can afford.