Property investing involves more than just buying low and selling high. This is especially the case in the United States’ real estate market. Moreover, these days a combination of variables complicate property investment decisions with added difficulty and risk. Knowing what the best investment is, and understanding when a property is a suitable for purchase is key. This involves being aware of how real estate dynamics impact factors such as worth, demand for the property and investment yield.
Financing Property Investments
Historically low interest rates represent a buying opportunity for investors seeking mortgage financing. Checking mortgage interest rates when searching for a mortgage rate helps with evaluating costs. Currently, 15 year fixed rate mortgages carry a national average interest of around 2.74 percent. Furthermore, mortgages with 30 year terms have average interest rates that average near 3.54 percent. Adjustable rate mortgages or ARMs have even lower rates, but they are variable and often rise later on. Rates this low make a reasonable return on investment more probable as it lowers the selling price required for a profit; it also gives sellers more room to bargain.
Staying aware of price trends and real estate market forecasts is also prudent when evaluating the viability of property investments. Between 2008-2012 property prices sank a lot. However, in 2012 economic growth contributed to a rebound in real estate prices. These price increases were not even across the country. To illustrate, real estate prices in the Los Angeles metropolitan area have increased far more over the last 14 months than property located in New York City metropolitan area. Despite this, property prices are still near their 2009 lows.
Different regions in the country have varying property tax levels. Some states have property taxes of less than half a percent, whereas other states have rates closer to two percent. On a $100,000 property, this can mean anywhere between $500 and $2,000 a year in maintenance costs. Choosing a region where prices are rising, but where taxes are relatively low helps reduce this expense. Moreover, by wisely considering other aspects of the investment process such as local economic development, the risk associated with tax costs are less likely to erode capital gains by a great amount.
Investment property Options
How property is invested in also influences how good an investment it turns out to be. For example, individuals have the choice to place money in real estate investment trusts or REITS. Another property related financial instrument is mortgage real estate investment trusts or MREITS. Real estate is also invested in through real estate investment groups and for different purposes such as renting, leasing or house flipping. The kind of investment property is also a factor. For instance, property is used for commercial, residential or community purposes.
The inventory of residential home on the market is currently limited because mortgage companies are holding on to foreclosed properties. Mortgage firms benefit from low inventory because it helps raise building prices. This reduces their losses when they finally do sell the homes. In addition, since financial institutions have the luxury of not immediately liquidating assets such as property, then they are able keep it until the sale price is sufficiently high.
Determining whether or not to invest in property is also a function of time. To illustrate, an investment duration of 30 years affords buyers a greater chance to see the sale price they are seeking. This in turn increases the probability of effectively capitalizing on purchases. Moreover, allowing more time for property prices to go through economic cycles increases the chance a specific sale price target will be reached. Thus, a longer-term investment increases the viability of that real estate as an investment.
Any investment carries some level of risk. In property investing these risks include opportunity costs brought about by competing investments, and systemic factors such as interest rate risk. Another risk property investors would do well to be cautious of is liquidity risk. This is when the property does not sell easy due to market factors such as cost and economic conditions. Other types of risk to be leery of are management related risks and market risk. Moreover, if management costs rise too high, then there is a risk of loss. Furthermore, if prices do not rise high enough via appreciation, then a property is vulnerable to price risk.
The U.S. property market is not the same as it was before the housing crisis of 2008. Finding the right investment property in the U.S. involves more due diligence of variables such as local and regional market activity. It also involves greater scrutiny of key market statistics such as new and existing home sales data. Other important factors to consider are reliability of property appraisal, and sufficient assessment of expected costs including any property repair and showcasing. This does not have to be a difficult process, and if it is done with an eye for value, then the chance of it proving to be a solid investment rise.
Editor’s note: I love the show Income Property on HGTV. Owning a primary residence with an attached income suite would probably how I would get started with real estate investing.
Have you considered owning an investment property? What other issues would you consider before buying?