Rental Income Properties: The Time To Buy May Be Coming
The real estate market is in a state of flux at the moment, thanks to a variety of factors and exacerbated by the lingering effects of the COVID-19 pandemic. Nevertheless, where some people see volatility and unpredictability, we see opportunity. The next few months might be the best time to purchase rental property.
Are We In Another Housing Bubble?
One of the major reasons for hesitation among real estate investors is the fear of a new real estate bubble like the one we experienced in 2008. The last thing anyone wants is to buy a rental property only to watch the value plummet in a housing crash a few months later.
Unlike 2008, however, the current surge in housing prices shows very little of the same hallmarks of the previous crash. Fortune points out several reasons not to worry about a similar bubble:
- Credit-worthiness: over the last few years, the proportion of borrowers with excellent credit ratings (better than 760) has increased enormously
- Housing supply: total listings are at their lowest number since the late 1990s, due in part to reduced construction rates and in part to people opting not to sell out of concerns about job security.
- Better financial situations: the typical consumer is in a much better position financially, holding the lowest debt as a percentage of disposable income since the 1980s.
The upshot of all these factors is that we’re not concerned about a sudden, precipitous drop in home values or rental demand. The housing market should remain relatively stable for the foreseeable future.
Low Interest Rates
Prime interest rates dropped to near zero during the COVID-19 pandemic, and the Fed has announced that they’re not likely to rise for another two years at least to help the economy recover. As a result, mortgage rates are hovering around three percent, depending on creditworthiness and lender.
This is as low as rates have dropped in decades. Given the outsized impact that even a small difference in interest rates can make to the total amount paid over the lifetime of a loan, you could be saving thousands or tens of thousands of dollars by locking in a 30-year fixed rate now.
Potential Foreclosure Surge
On a more speculative note, there’s the potential that we’ll see a significant uptick in foreclosures over the next few months. Millions of people lost their jobs during the 2020 pandemic and, despite a significant bounceback, only about half of those jobs have been recovered.
This points to the possibility of large-scale foreclosures, which could open up lots of relatively low-cost housing that might be perfect as rental properties. On the other hand, most of the people who lost their jobs during the pandemic and haven’t gotten them back tend to be renters, so their impact on housing inventory might be minimal.
High Demand for Rental Properties
During the past year, many hotels were forced to close in order to comply with local ordinances. As a result, rental-by-owner services like Airbnb and VRBO skyrocketed in popularity, allowing people to stay in a house without interacting with other guests.
While hotels have reopened, we also anticipate that the demand for rental properties will remain high in the coming years, creating ample opportunity for investors to make their money back on their mortgages.
A possible downside to the rental property market right now is a nearly unprecedented dip in home inventory. As of December 2020, there were a total of 1.07 million houses on the market in the United States, the lowest since 1982.
This dearth of available houses has driven an enormous rise in housing prices — typical home prices have risen more than 13% in the last year, the highest annual gain since 2005. Even with low mortgage rates, housing might be too expensive in certain zip codes to make a rental property worth your investment, so do your research on a localized basis first.
Rental properties aren’t the best investment for everyone, but they can be an excellent source of additional revenue and a great way to diversify your assets. If you’re looking to branch out into the rental real estate space, now might be an excellent time.