The interest rate has dropped to historic lows in the last year in response to the Federal Reserve’s efforts to stabilize the economy during the COVID-19 crisis. In March of 2020, the Fed dropped federal interest rates to between 0.00 and 0.25%, which caused short and long-term rates to drop substantially.
Low interest rates can make it a good time for buyers to lock in a 30-year mortgage rate, but unstable rental markets and competitive real estate markets make many real estate investors wary. To help guide you through this uncertain time, here’s a look at what to expect from interest rates in the next year and some of the best places to purchase real estate in 2021.
What Investors Should Expect in the Coming Year?
Mortgage rates hit an all-time low with interest rates of just 2.65% in early January of 2021, and they’ve steadily climbed since then. As of the first week of May, the average interest rate for a 30-year fixed-rate mortgage was 2.96%.
While the rate has increased slightly over the last few months, it continues to be an attractive one for buyers, especially since it’s expected that this rate will continue to rise as the economy recovers from the pandemic.
The bottom line is that as long as the economic outlook continues to look good, investors should expect the interest rate to rise. With this in mind, the Mortgage Bankers Association predicts that rates will reach 3.6% by the end of 2021.
What does the Low but Rising Interest Rate Mean for Investors?
At first glance, the current interest rates would be a clear signal that now is a good time to buy. However, changing rental demands and low inventory cloudy the issue a little bit. Now is a good time for:
- Current Landlords and investors to refinance their mortgage
- New investors to take advantage of the current interest rates to purchase an investment property
There are pros and cons for investors wanting to buy when interest rates are low. When interest rates are higher, there is less competition for real estate, resulting in lower purchase prices. Additionally, higher interest rates mean fewer people buying houses and increased demand for rental properties. In fact, a 1% increase in interest can lead to a windfall of profits for investors in the right market.
Despite the benefits that can come from rising interest rates, lower interest rates offer the potential for fewer expenses and increased profits. With this in mind, it’s worth looking for a good opportunity while interest rates remain at historically low levels. When doing this, it’s important to do plenty of research and to find the right place to invest.
Certain Locations Provide Better Investment Opportunities
When it comes to real estate, location always matters, but that is particularly true in the current market where some regions offer substantially better investment opportunities than others. When searching for a good location to invest, it’s important to pay attention to the following area’s rent as a percentage of income; job opportunities; vacancy rate; population and growth rate; and home prices. Spending some time reviewing census data and evaluating those factors can help you find the right location to buy.
Work from Home is Here to Stay
The shifts caused by COVID-19 have led to an influx of people in suburban areas. Even as COVID-19 restrictions are lifted across the country, this is a trend that is here to stay. Many businesses are making long-term shifts towards working from home or, at least, having some sort of hybrid model.
The result is that renters are leaving city centers and moving to suburban areas with a particular eye for more square footage and outdoor space.
Some Cities are Growing More Quickly Than Others
Given these shifts, there are some areas of the country that are seeing higher population growth than others. These are good locations for investors to focus on as they will likely see increased rental demand in the coming years.
Reviewing Census Bureau data on which areas have the greatest increase in population is a good place to start when looking for the right place to invest.
Proceed Cautiously as the Interest Rate Climbs
A challenge for many investors is that in the current environment, it’s an affordable time to own but an expensive time to buy. Nevertheless, now can be a good time to invest if you can find the right opportunity.
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