What’s not to love rental property? It’s an opportunity to create passive income. You can create relatively immediate positive cash flow, you have someone else pay down your debt, and over time, you have a very high likelihood that your investment will be worth more than when you purchased. You can even match the length of the mortgage to a specific life event, like retirement, and have your mortgage paid off and other than property taxes, maintenance, and the period between one renter leaving and another moving in, you have pure cash flow!
Maybe the real question is now the right time? At the time of this writing, October 2018, what do we know with absolute certainty? Interest rates! We don’t know where they are going, we don’t know where the real estate market is going, we don’t know if it’s on the way down, or how much it may go down or for how long.
As I mentioned, given enough time… the market will rebound. If you are looking for a place to park some available investment capital for one or two years, residential real estate is likely not the best place to invest.
The question to ask yourself is how confident are you that the market will be higher given the time horizon of your investment. We can never know with certainty when we will be selling our investment property. Though, you can have an anticipated holding period. I like to go into buying a property with an “infinite” holding period (in my lifetime, isn’t 20-30 years somewhat similar to infinite?). During this time, I am willing to be the market will be higher than it is now, even if I have to go through a down cycle every certain amount of years.
If I am not selling and don’t need to sell and have invested money I am likely not going to need, then I can very likely weather down cycles. Sure, rental income may go down if a lease expires during a down time. Then that gets made up when the market recovers.
“I think the market is on it’s way down, aren’t I better off waiting?” Depends. Ask me again in 6-24 months and I’ll let you know. What if you will have another down payment saved in 24 months. Then if you buy now and can buy another home lower in 2 years, at least you are in the game now, have locked in today’s mortgage rate, and have 24 months of someone else paying down your mortgage for you. Then in 2 years buy again. It may not be the same as dollar cost averaging as you can with a mutual fund or stock purchase, though at least you are in the game.
If the market goes down 30% from today’s purchase price, assuming the market at some point surpasses today’s prices, then so what? Yes, you could have a better purchase price in the future. How do you know when? Will you pick the bottom? Can you pick the bottom of a liquid stock like Microsoft on any given day? (Hopefully you answered “no.”)
Let’s look at dollar amounts. Let’s say today’s purchase is at $600,000. A 25% down payment puts you at a $450,000 loan amount. At 5.25% interest that is a monthly payment of $2,485.
Let’s say you wait a certain amount of time and buy at $500,000 (a roughly 17% drop in price). At today’s interest rate, the monthly mortgage would be $2,070. A nice increase in cash flow of $415 a month! Though, with the Fed having an upward bias on interest rates, should rates only increase to 6% (still a fantastic interest rate) when the price decreases to $500,000, then your monthly mortgage would be $2,248. Still $237 a month better than buying today. Though, these are “what-if” scenarios. In this scenario, we are talking about less than $3,000 annually.
There are no guarantees in life. Money in the stock market will fluctuate as will money invested in a business. Investing in real estate isn’t right for everyone. While it may be uncomfortable investing in today’s market, if you are planning on investing and holding for the next 10 years or more, it could very well make sense!