Record-low mortgage rates have made real estate more affordable, but with so many other economic uncertainties, is the time to dive into the real estate market right now?
"The age-old question of when to buy real estate is being asked more often than pre-pandemic," says David Tuyo, CEO of the University Credit Union in Los Angeles. "As many Americans face job and economic uncertainty, near-historic-low rates make home purchases very attractive."
With the economy in recession due to the coronavirus and millions of unemployed people, some potential investors are asking what they should do. And low interest rates aren't all good news for buyers either. Although low rates can make a property affordable at first, sellers may also increase their asking price to catch some of the value generated by low rates.
Are you investing in occupying or renting out?
Investing in real estate may mean buying to occupy it or rent it out. That may sound like a trivial difference, but it's important how you think about your purchase and how it's financed.
If you're buying a property because you're planning to move there, decide whether it makes sense to actually buy rather than rent. Are you going to live in the region in the long run so that it makes sense to tie up your money in a down payment and pay the closing costs and other transaction fees? Many experts recommend that you have to occupy the property for at least seven or eight years to make it truly meaningful to purchase.
Low mortgage rates
Mortgage rates are at record lows, and some lenders are now offering 30-year mortgages below 3% for owner-occupied housing. It's hard to see such low prices, and not hit your checkbook, if a house already makes sense for you.
Such low rates can make owning a house more affordable than renting a house, depending on your circumstances. And with the mortgage expected to be the single highest expense to a homebuyer, low rates are likely to fuel transactions.
But prices can also cut both ways. If mortgage rates increase in the future – definitely a major "if in the near term, as the Fed vowed to hold its rates low by 2022 – then it could hit house prices. But with low rates making homes more affordable today, buyers will see potential rate hikes as something worth thinking about when they arrive, if they ever do.
Homes are cheaper, or are they?
Low mortgage rates may make property initially more affordable, but they may also send home prices upward, negating the impact of low rates. This impact could be exacerbated by a low inventory in some places, making buyers search for what houses are still open.
Take a $100,000 30-year mortgage with a 5 percent interest rate, for example. The completely amortized monthly payment will amount to around $537. At a cost of 3.5%, the new monthly payment will be $449. If you were only refinancing that you would have captured all the value.
However when sellers see that homes are more affordable due to low rates, they will increase their asking price. At a rate of 3.5 per cent, the same homeowner could now afford a $120,000 mortgage and pay the same monthly payment ($539) as before at a higher rate.
Check your financial condition and your willingness to make payments
A significant investment in real estate allows you to have a solid financial position. If you own to occupy, then you'll want to make sure that you're in a position to make the payments, while the landlord needs enough cash to make the repairs to cover the mortgage if the occupant is unable to make the rent.
If you are sure that you are ready to move forward with an investment, the next step is to build a solid property analysis process. This starts with learning how to analyze various types of properties. Most people are familiar with the simple method of assessing a single-family home that relies heavily on a market study of comparable homes in the community. Multi-unit dwellings, such as small apartment buildings and duplexes, should be reviewed for financial efficiency. That's what we're going to take a closer look at.
For multi-unit assets, you want to look at the revenue and benefit created by the land. Broadly speaking, there are at least two sets of data that you want to test. Latest financial information and financial results planned to be reached by the new owner – Pro-Forma. The data of the current owner will include valuable statistics, such as rents received, vacancies, property taxes and expenditures, but there is a limit on how much this will apply to your particular case. For example, has the owner raised rents in order to keep in line with the current market? Or are you going to be able to raise rentals (though perhaps not all at once)? Has the property been well handled on the cost side or are big expenditures lurking in the near future? When is the last time the property has been taxed? You need all this knowledge and more to carry out a comprehensive Pro-Forma financial review.
For example, is the current cash flow dependent on the owner taking out a mortgage 20 years ago almost paid off, and he or she has increased the rent 18 times over the years? Your positive cash flow would be much smaller if you take out a new mortgage even if it has a low interest rate. Rosemary, the basic details you need to start a financial review includes:
Bear in mind that the new owner is going to put his finances in the best light. Don't just embrace the spreadsheet that he or she offers. Insist on verifiable records including income tax returns, property tax bills, real rentals deposited, and maintenance receipts. Of course, you need to have the property professionally inspected to ensure that maintenance and repairs are not seriously overlooked.
Sexton Group Real Estate Property Management in Berkeley, California is a boutique real estate company specializing in residential sales as well as property management services for properties throughout the San Francisco Bay Area. We have 3 offices to serve you, one in the heart of picturesque Berkeley, one near downtown Oakland and the third in the heart of historic Lafayette, California. The Sexton Group encompasses the essence of Berkeley’s charm and Lafayette’s family-oriented vibe all with a relaxed, down-to-earth nature. We are an amazing group of agents whose wealth of experience spans more than 25 years in the industry. Looking to sell a home in Contra Costa or Alameda County? Contact us today for your free consultation!