5 Things to Consider Before Investing
The conventional wisdom says that when interest rates are low, it’s an excellent time to buy a home. That’s the problem. The conventional wisdom is not always wise. And it overlooks the details. Interest rates are low now because our economy is in a pandemic-created recession with millions of people out of work.
As a home buyer or as an investor, there are several things to consider. Low-interest rates should stimulate demand, that’s the point, but sellers often raise their prices in response to the increased demand (Economics 101). There’s a lot to know.
5 things to consider
Mortgage rates are at historic lows, and the U.S. Federal Reserve has indicated they will keep rates low through 2022. Mortgage interest rates are the “cost” for using (borrowing) money for a set period of time. The higher the interest rate, the more money a borrower pays in the form of interest. For a lower interest rate, the P & I (Principal and Interest) for an owner-occupied residence on a 30-year loan will be lower, and the overall cost of the asset/home is reduced. That’s good news. Read on.
2. Is it an “investment” property or a home?
At the CREM Group, we represent both buyers and sellers in Orange and Los Angeles counties. We specialize in probate, trust, and conservatorship homes, but represent all kinds of properties from commercial properties to undeveloped land. Often, people who are going to live in a house don’t think of themselves as investors, but they are. They just happen to live in their investment, unlike investing in the stock market.
If you’re looking for a good deal, a probate home often offers a lower price (some are fixer-uppers). But the bad news is, they can take a while to purchase, sometimes up to a year or more. In these times, with interest rates destined to be depressed for up to two years, that might be a good decision.
3. Are homes REALLY more affordable?
Depressed mortgage rates may make property more affordable at first glance, but they may also send home prices sky-high, reversing the effect of low rates. Our CREM Group real estate agents have found that low inventory in some areas of Los Angeles and Orange counties LINK has frustrated buyers searching for the few homes on the market.
Here’s what’s happened. People with homes are refinancing to a lower rate, keeping their homes and paying a smaller mortgage, which they may need if they’ve had hours cut or been forced to live on a single-income because one partner lost their job. Or, they may see that since homes are more affordable due to low rates, they may choose to sell their home and raise their asking price.
We’ve seen savvy sellers raising asking prices by up to 20 percent! In that case, the buyer must come up with more money for the down payment. It doesn’t always happen quickly, so buyers may still have time to snap up property with a good value (price) before the market fully reflects these low-interest rates. The CREM Group is here to assist our clients in making the best decisions.
4. Spoiler Alert: Check your finances to make sure you can make the payments.
Historically low interest rates are very tempting, like the Sirens in Greek Mythology. The Sirens entice passing sailors to come closer with their beautiful voices, only to have the boat be smashed to smithereens when it gets too close to the shore. It’s said Odysseus had his crew tie him to the mast of the ship and promise to ignore his pleas to turn the ship toward the Sirens. Two things: If you’re looking to occupy, then be sure (our calculators are here) you’re able to make the payments. Same thing with rental properties. Factor in that you have enough cash to make repairs and cover the P & I if a tenant can’t make a rent payment or if you have vacancies. They can be killers. Like Sirens.
We have specialists that can help you if you’re purchasing to rent out a property, because your considerations are different. The analysis should consider the rental income for the property. Know the market in the area you’re considering. The CREM Group will look at that for you and advise you. Also, income property investments usually require a larger down payment than for the owner-occupied version. These vary by the type of property, supply and demand, and lenders.
Can you really afford the P & I? What about the property taxes? Don’t forget those! And homeownership has other unexpected expenses, like when the plumbing breaks or the roof needs repairing. Have a “fudge” factor.
6. Make probate and trust home purchases your side hustle.
Trust and probate home purchases take time. So, while interest rates are low, this might be a great time to start your real estate investing “side hustle,” where you can enjoy passive income. Otherwise, low-interest rates make high-ticket homes, apartments, and commercial properties a more accessible entry into the world of being the real estate mogul you always wanted to be. Passive income means sitting on the beach drinking piña coladas while your bank account grows quietly in the background. We know! Where do we sign?
Despite the uncertainties created by the coronavirus, the economic climate, and civil unrest, the resulting historically low interest rates may still prove to make real estate an attractive investment. Living in your “investment” as your primary residence is an excellent idea. The marketplace for real estate is a wily intricate affair. Buyers, sellers, lenders, the Fed, the supply and demand, and surrounding world, national, and local events can change the outlook for real property. Check with reliable, professional real estate agents that have resources they trust to help you make the right decisions in this temptingly low-interest rate world. The “Sirens” are out to get you. Don’t let them.
As always, contact us by email here if you have any questions about real estate, probate real estate, trust real estate, and conservatorship real estate, especially in Los Angeles and Orange Counties in California (currently expanding to Riverside and San Diego).
Mark Cianciulli, Esq. [email protected]
DISCLAIMER: This content is meant purely for educational purposes. It contains only general information about real estate and legal matters. It is NOT legal advice and should not be treated as such. We recommend consulting a legal or tax professional before acting on any material, opinion, or point of view described herein.