The purchase of real estate has long been a complicated matter that can frustrate even the most experienced investors. If you have been wondering if this is a good year to invest in real estate, here are some key things to know.
There are so many variables to consider before making any real estate investment. Before moving ahead, there are a few major questions that must be answered before making the decision to invest.
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Are we experiencing a buyer's market or a seller's market?
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Are mortgage interest rates trending up or down?
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Should you invest in a single-family rental property or a multi-family complex?
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Can it be profitable to buy, fix and flip a house, considering today’s construction costs?
Generally, the first and foremost consideration is the purpose of the investment and how the investor plans on using it, whether as a primary home, a fix-and-flip project, or a rental property, as well as the location of the property. With the purchase of a fix-and-flip, you must invest money and labor to see a return, sometimes a considerable amount of money. When a house is being bought as a primary home, as opposed to a rental property, there will be different needs based on whether the purchase is planned to be a short- or long-term commitment.
First Time Homebuyers
The purchase of your first home can be a huge step on your way to financial independence, though historically, there have been a few hurdles that can make home ownership feel daunting.
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Until recently, monthly rents have often been lower than expected mortgage payments. However, the stratospheric increases in average apartment rents have mitigated those effects, and recently many more people are considering buying and moving into their first home.
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A down payment can be a difficult financial goal for some. However, lower-income households or those with special circumstances may find federal and state grants and programs to assist them in procuring the amount they need.
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Interest rates can be a source of concern, whether because of general inflation, poor credit rating, or lack of homeownership experience. In 2022, the Federal Housing Finance Agency (FHFA) launched a First-time Home Buyer Mortgage Rate Discount. This eliminates up to 1.75% of mortgage rate add-ons for qualified first-time home buyers.
Rental Property Investments
Purchases of single-family homes have seen impressive market increases in the past few years, especially with more people making the choice to move away from cities into more rural areas. However, it appears that in 2023 home prices are finally slowing down, largely because of the higher interest rates. As this market cools, some individuals who purchased homes to flip and resell have instead chosen to rent the property to households who used to live in an apartment. It seems there is a steady need for home rentals, which can often be a good stepping stone from apartment rental to home ownership.
Fix-and-Flip Investments
Buying homes with the sole purpose of fixing and reselling them can be tricky at any time, but 2023 is expected to be particularly challenging. The prices of the available homes on the market have continued to drop after a couple of years of strong increases. Along with the slowing market, some sellers are likely to offer more concessions to close their sales, so there are still good deals to be found.
Another challenge for fix-and-flip investors is the often prohibitively high-interest rate on short-term loans for the repairs needed to sell a home. Long-established investors may have the network to overcome this hindrance, but newer investors may want to wait for interest rates to drop before jumping into the fix-and-flip market. The highest returns in this market can be made when there are a limited number of homes for sale, high demand for those homes, and rapidly rising prices. 2020 and 2021 were good examples of this: homes were selling within days of listing - and in many cases, for more than the asking price.
If you're considering a real estate investment, the financial advisors at Myrick CPA can aid in reviewing your finances and presenting you with options to meet your investment goals. Contact Myrick CPA today to schedule a virtual appointment to help you get started on the path to real estate investment.
