In many ways, the time spent inside during the strict lockdowns across the country probably caused many Americans to rethink how they live. Further, with the likelihood that there may be another stricter lockdown in the fall, many want to get their housing situation worked out during the hot summer months.
Another group of Americans see a unique opportunity in the housing market. Rather than acquiring a new personal residence, they are looking to buy property to rent out.
But buying and selling a house is one of the biggest financial transactions you can undertake in good times. With a pandemic raging, it requires that you take a careful look at the environment around you to ensure that whether buying a new home or investing in rental property, you make sound decisions.
Let’s look at the pros and cons of diving into the current housing market.
Low Rates, More House
Mortgage rates have been at historic lows for almost 20 years. Gone are the days that Boomers remember of 13% interest rates. But for Millennials and Gen X, these 30-year fixed rates in the 3-4% range seem the norm.
As rates are now dipping below 3%, many Americans of all ages see an opportunity to either refinance or purchase with very cheap money. This is a powerful incentive, as they can buy more of a house than previously anticipated.
Further there might also be a better tax advantage for taking on a bigger mortgage. While the majority of Americans now use the standard deduction, if the mortgage is large enough, the interest payment deduction might be enough to move them into itemizing their deductions.
Great Way to Generate Income
Other people are looking to purchase a rental property in order to generate a passive income stream. The time might be right for this as there’s a new group of renters looking for homes.
In affluent areas such as Lake Tahoe and the Hamptons, many city dwellers are considering the possibility of renting since their families will want more space and natural environments in the fall for both work and school from home. For potential investors, finding a good rental property has been a priority.
For those who can afford to purchase a property to rent out, it can be a great income stream. However, it is important to make sure that the rents you take in will cover all of your costs. This includes not just mortgage and real estate taxes but insurance and home maintenance as well. If these owners can make their rental cashflow positive, it may be tax neutral due to depreciation.
Potentially Buying at the High
There are, of course, risks to consider in this real estate market. We are seeing significant numbers of people moving out of cities and into the suburbs or smaller urban areas. As a result, certain property markets are at all-time highs.
When bidding on homes in these markets, it’s important to maintain objectivity regarding home value. Whether it is a personal residence or a rental property, you need to think about time horizon. If it’s a property you’ll hold for less than five years, it might be risky to buy in at any cost. But if this is a ‘forever’ home or a property that you want to keep for a long time, you can give yourself more leeway on cost.
Further, just because the Covid-19 pandemic has made the cities less attractive doesn’t mean they will always be unappealing to buyers. In fact, this actually may the right moment to consider purchasing in an urban area if values drop significantly. To some degree, the better investment might be to approach the market from that perspective, since most potential buyers will be thinking just the opposite.
It’s an interesting time in the real estate market. With low mortgage rates and the population fleeing to more suburban areas, the landscape is shifting. But remember that being strategic both on how you consider investment in real estate and how you use your real estate over the long term will have an impact on whether you make the right decisions.