Should You Invest in a Rental Property Right Now?
All sectors of the economy have been impacted by the COVID-19 pandemic and the shutdowns and slowdowns it’s caused. The real estate industry has not been immune from these impacts, but interestingly it has recovered more quickly than other sectors and done well over the last year. After a slow-down in the spring of 2020, the residential real estate industry, as a whole, has recovered and done well, so should you invest in a rental property right now?
That said, real estate markets in some parts of the country have been more heavily impacted than others. That coupled with volatile rental markets and an uncertain global economy have many investors wondering whether now is a good time to buy a rental property.
The reality is that there are pros and cons to purchasing a rental property right now. Here are a few key factors to consider before deciding whether or not the time is right for you.
Low Mortgage Rates
Mortgage rates are currently at historic lows. As of April 8, 2021, Freddie Mac reported that the interest rate for a 30-year fixed-rate mortgage is 3.13%, and the rate for a 15-year fixed-rate mortgage is 2.42%. This low rate means that investment properties are affordable for more investors and will produce a higher ROI.
Not surprisingly, low mortgage rates have led to higher demand in real estate markets. The increased demand for properties is leading to above-average appreciation, and Zillow predicts that, on average, home prices will go up by 11.4% in the next year.
While this is a benefit for investors, it also means that there’s more competition when buying houses, leading to higher purchase prices. However, when evaluating higher prices, Landlords should not overlook the benefit that comes from above-average appreciation. Further, higher home prices mean that more people are priced out of the market, which leads to a larger pool of renters.
Similarly, there is currently limited inventory. The increased demand coupled with sellers holding off due to COVID-19 and a drop in construction and real-estate development has led to limited inventory in residential real estate markets across the country. Again, while this means higher prices, it also means stronger rental markets.
Tight Mortgage Restrictions
While mortgage rates are low, lenders have tightened mortgage restrictions, making it more difficult to get a loan. High unemployment rates have led to tighter restrictions throughout the lending industry, but investors face even tighter scrutiny, due in large part to the number of Tenants that are behind on rent and the ongoing eviction moratorium. When Tenants fall behind on rent, Landlords often fall behind on mortgage payments. Because of this, getting a mortgage, especially one with favorable terms, can be difficult for investors right now.
Ongoing COVID-19 Impacts
Many COVID-19 restrictions have been lifted, the crisis continues to impact rental markets. Most notably for Landlords is the eviction moratorium, which is still in place. This combined with high unemployment is causing ongoing disruptions to rental markets.
Landlords, should they invest in a rental property, must consider these factors before purchasing a rental property and make sure they’re in a position to deal with rent defaults and ongoing missed rental payments, should this issue arise.
Price Fluctuations Around the Country
The biggest factor to consider before purchasing a rental property is local market conditions. Some markets have been impacted more by the pandemic than others, leading to declines in demand and rental prices. While most of the country is recovering and stabilizing, it’s important to research a market before investing.
Specifically, look at rental occupancy rates, compare rental prices and mortgage payments, and know both the area’s unemployment rate and Tenant default rate. Further, with the current economic uncertainty, it’s important to invest in markets where the local economy is showing signs of recovery and where populations are growing.
There are some clear advantages and disadvantages to purchasing a rental property right now. Before making a decision, evaluate the relevant factors and thoroughly research local market conditions. And, if you do decide that you should invest in a rental property, ezLandlordForms has the tools and resources to support you through your entire Landlord lifecycle.