The last few years have been a tough market for buyers. Record-high prices, low inventory, and more competition made it increasingly difficult to invest in real estate.
But the market is signaling change. Rising mortgage rates and inflation are eating away at affordability for many homebuyers, which has in turn caused price growth to falter.
This shifting marketplace is leading some to wonder if now is a good time to invest in real estate or if it’s better to wait for prices to correct further. While it may seem like waiting is the better choice, here’s why the answer is not so simple.
Price isn’t everything
Price is an important consideration when investing in real estate. Generally, the lower the purchase price, the greater the return potential. However, it’s not the only factor to consider. Mortgage rates play an equally critical role in the profitability of an investment.
Higher interest rates translate into higher monthly mortgage payments and reduced cash flow in a rental property. It also means you’re paying more for the home over time, even if prices are 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 increases by 1% yet the home price goes down to $320,000, the total paid over the life of the loan would be $728,143, meaning you’re actually paying more despite the lower purchase price.
Right now, interest rates are rising, and there’s no hard cap on when rates will level off. Prices also aren’t falling dramatically, but rather price growth is simply happening at a slower rate, which means a $30,000 price cut is unlikely for most markets in the very near future.
Securing a low interest rate, even at what seems high today, could lead to savings down the road. And lending often tightens when we enter recessionary periods, which could make securing a loan far more difficult a year from now if a recession is where we’re headed.
Cash flow should be your focus in any market
Real estate is a great inflation hedge, since real estate values and rents rise with inflation. Investors can increase rental rates according to the market, adjusting for factors like higher property taxes or insurance. Plus, if you are focused on cash flow over appreciation, you can use your money to create passive income that can long withstand any market volatility.
More often than not, real estate is a tremendous 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 likely better to put that money to work right now.
Waiting around for prices to drop in a high-inflation, high-interest market may not be the best move right now. If you’re on the fence about buying and owning real estate yourself, consider investing in real estate investment trusts (REITs) instead.
These special types of stocks are trading for a steal right now and give investors exposure to income through dividends, as well as diversification into the real estate market. Just make sure to choose wisely. Not all REITs are created equal. Thankfully, there are dozens of high-quality REITs to choose from that have no shortage of cash flow and attractive dividend yields.