Jhe last few years have been a difficult market for buyers. Record prices, low inventory and increased competition have made it increasingly difficult to invest in real estate.
But the market is signaling a change. Rising mortgage rates and inflation are eating away at the affordability of many homebuyers, which in turn has slowed price growth.
This changing market has some wondering if now is the right time to invest in real estate or if it is better to wait for prices to correct further. While it might seem like waiting is the best choice, here’s why the answer isn’t so simple.
Price isn’t everything
Price is an important factor when investing in real estate. Generally, the lower the purchase price, the higher the potential return. However, this is not the only factor to consider. Mortgage rates play an equally critical role in the profitability of an investment.
Higher interest rates translate to higher monthly mortgage payments and reduced cash flow in a rental property. It also means you pay more for the house over time, even if prices go down.
For example, a $350,000 home loan with a 30-year fixed interest rate of 5.5% would cost $715,413 in total (principal and interest) over the life of the loan. If the rate goes up 1% and the price of the house goes down to $320,000, the total paid over the life of the loan would be $728,143, which means you’re actually paying more despite the lower purchase price. .
Right now, interest rates are rising and there is no hard cap on when rates will stabilize. Prices are also not falling dramatically, rather price growth is simply occurring at a slower rate, meaning a price drop of $30,000 is unlikely for most markets in the future. very close.
Getting a low interest rate, even at what seems high today, could lead to savings in the future. And lending often gets tight as we enter recessions, which could make getting a loan a year from now if we head into a recession.
Cash flow should be your priority in any market
Real estate is a great hedge against inflation, as real estate values and rents rise with inflation. Investors can increase rental rates depending on the market, taking into account factors such as property taxes or higher insurance. Plus, if you focus on cash flow rather than appreciation, you can use your money to create passive income that can withstand any market volatility for a long time.
More often than not, real estate is a terrific investment, regardless of market conditions. Buying low and selling high is the ideal scenario, but as you can see other factors can come into play. If you have the capital and knowledge to invest in real estate, it’s probably best to put that money to work now.
Waiting for prices to fall in a market with high inflation and high interest rates may not be the best decision at the moment. If you’re about to buy and own real estate yourself, consider investing in real estate investment trusts (REITs) instead.
These special types of stocks are currently trading for a steal and offer investors exposure to income through dividends, as well as diversification in the real estate market. Just be sure to choose wisely. Not all REITs are created equal. Fortunately, there are dozens of high-quality REITs to choose from that don’t lack attractive cash flow and dividend yields.
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