When it comes to investing in real estate, you can take different routes to earn money. And one option is to buy a house that you rent out to tenants.
Many real estate investors do quite well owning rental properties. And if you’re willing to put in the work, you might find that owning a rental is a financially rewarding experience.
But given the state of the housing market, you might be wondering if now is the right time to add a rental property to your real estate portfolio. The answer? It depends.
Why now is not the best time to buy
These days, home prices are on the rise nationwide due to strong buyer demand driven by a lack of inventory. In fact, at the end of May, there was only 2.6 months of housing supply in the real estate market, according to the National Association of Realtors (NAR). It would likely take at least four months of home supply to cool the market significantly.
In fact, anyone buying a home today should expect to pay high prices, and this extends to investors looking to buy rental properties. The NAR reports that the median selling price of an existing home in May was $407,600, up 14.8% from the previous May. It also marked 123 consecutive months of year-over-year increases.
High mortgage rates compound the problem of rising house prices. After being at competitive levels from mid-2020 to the end of 2021, mortgage rates have increased this year. And so, if you can’t pay cash for a rental home, you should expect it to be expensive to finance.
Why this is a good time to buy
Although you can pay a lot more money these days to buy and finance a home, the advantage of buying today is that rental demand is strong. Right now, the US job market is strong, which means more people can afford to rent their own homes.
In addition, houses have clearly become very expensive to buy, which means that many people have no choice but to rent because they cannot afford the property. As such, if you buy a rental property today, you may be able to get a lot of rent money from your tenants – money that can help recoup your expenses.
What’s the right call?
If you don’t have a lot of capital to work with, now may not be the best time to buy a rental property. But if you’re willing to be a little patient, you might do well to buy a house that you’re renting out at a time when tenants have no choice but to pay. Think about your personal finances and your goals to arrive at the best decision for you.
If you’re hesitant to tie up your money in an asset like rental property, you might consider buying REITs (real estate investment trusts) instead. The benefit is being able to invest in real estate without having to do a homeowner’s job or shell out a huge amount of money up front.