Recent inflation and fears of recession, along with a declining stock market and cryptocurrency meltdowns, may have led you to wonder where you should put your investment dollars. While it’s important to have a diversified portfolio, you might be happy to learn that real estate is generally a safe investment strategy–even now. Factors that might make other investments riskier than a few years ago are giving real estate investors a boost.
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With pandemic shortages, shipping delays, and all-around economic stress, the housing market took a downward turn in 2020. That lack of inventory, combined with a new interest in home life with so many people working from home, led to an abundance of prospective buyers who couldn’t find homes.
Some home buyers chose renting rather than waiting for either their dream home to come on the market or their budget to catch up to inflation. A recent study shows that in 2022, nearly 35 percent of households rent their homes, offering investors and house flippers the opportunity to meet the demand of a market that’s been tough on buyers.
Decreasing Home Prices
While the supply of homes declined and demand increased, prices skyrocketed. The median selling price of a home in the United States jumped from $274,000 in August 2019 to $370,000 in the same month this year.
The good news for those in the market to buy is that the pandemic-related price spike seems to be finally leveling off, due in large part to the increase in interest rates by the Federal Reserve.
The days of multiple above-asking offers may soon be behind us. As the hot home pricing cools, the market is beginning to balance out. In June 2022, for the first time since 2020, the percentage of homes that sold above list price actually declined, according to Redfin.
For investors looking to produce long-term ROI, the steadying prices are a welcome relief.
Lower home prices could also allow monthly income-seeking investors to enter the market more quickly than if prices had continued to climb at 2021 levels.
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Low Interest Rates
Though the Federal Reserve has raised rates in 2022 and looks to raise them again to hold off inflation that could lead to recession, the current interest rates—around 5.5 percent to 6.75 percent—are still comparatively low. Rates of 7 percent in the early 2000s, up to 10 percent in the 1990s, and a whopping high of 18 percent in the 1980s puts recent increases by the Fed into perspective.
Property owners will pay a higher monthly mortgage than they would have two years ago, but cash flow positive deals should still be available thanks to these low rates.
By far the biggest factor in whether or not to invest in rental property is the ability to make a return on that investment. High home prices plus low rents made for a tough time in 2021 for property owners.
Demand on housing and other economic drivers caused rising rents at a surprisingly quick rate. Median rent went up by almost 18 percent year-over-year in 2021, and in 2022 it’s already gone up by 10 percent over last year. To put this in perspective, rent went up 4 percent in 2019.
While this is difficult for many renters, it does allow rental property owners to stay in business, meeting higher mortgage payments and holding costs without losing their investment.
When determining the rent to charge, some landlords adopt the one-percent rule, which dictates that to be profitable, monthly rent must be at least 1 percent of the home’s purchase price. For instance, if an investor paid $185,000 for a house, based on this rule, the monthly rent for tenants would be $1,850. After mortgage payment, management fees, and other holding costs, the net operating income should give the investor enough to make the purchase worthwhile.
Some states do have rent control laws, limiting the amount landlords can charge annually for existing renters, so keep this in mind when shopping for a house. Investors should carefully assess the market in the area in which they purchase the rental home and consider what the market will bear in terms of rent. If the numbers align with their investment goals, this could be the right time to buy.
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With special reporting by Mel Childs