When you spend as much time as I do writing about real estate investing, you start to get the itch to own an income property of your own. In fact, I've been saving up for quite some time to purchase a vacation property that can function partly as a second home when I need an escape and also as a short-term rental.
At this point, I do have some funds available for a down payment on a vacation property. But in spite of that, I'm holding off on making that investment. Here's why.
1. Inventory is low where I want to buy
There's been a shortage of housing inventory on a national level that's made today's real estate market tricky to navigate for regular buyers and investors alike. In fact, as of late May, the inventory of available homes for sale was down 43.1% compared to a year prior.
That shortage extends to where I want to buy a vacation home, and in recent weeks, the selection has just been abysmal. In fact, a lot of the homes I've seen available are too small for my family, which means they'll also be too small to accommodate families who may be interested in renting. And that's reason enough to wait.
2. Property values are up
In April, the S&P Case-Shiller National Home Price Index was up over 14% year over year, representing the largest gain in its 30-year history. Home values have skyrocketed on a national level as low supply has fueled buyer demand. And right now, I know I'll pay a lot more for a vacation home than I normally would.
That's a problem for a couple of reasons. First, I don't think homes in the area I'm looking at are worth the asking prices I'm seeing. Secondly, buying a vacation property is different from buying a primary home. If I find that I'm unable to generate the rental income I think I can get from that vacation home, I'll want the option to sell it. If I overpay, the likelihood of me taking a loss should I choose to sell increases. It's a risk I don't want to take.
3. Mortgage rates aren't pressuring me
At this point, it's looking like the earliest the Federal Reserve will think about raising interest rates is 2023. Of course, the Fed doesn't set mortgage rates, but it influences how they trend. As such, I can see mortgage rates staying low for a good year and a half before they start to come up. And once they do begin to increase, I don't expect them to jump substantially. Rather, I think we'll see a gradual increase.
All told, I'm not convinced I'll lose out on a competitive mortgage rate if I don't buy a vacation property now. And given where home prices are at, it's just not worth it.
4. It's too late to capitalize on the current travel boom
The demand for rental properties has soared this summer, given widespread vaccination rates and eased pandemic-related travel restrictions. And as much as I'd love to take advantage of that high demand, I recognize that I'm a bit too late to that party.
Right now, rental properties are booming, but that demand is likely to start waning once summer wraps up and families are back on school schedules. Furthermore, I think travelers will start favoring hotels more as private rentals grow increasingly expensive and people get used to post-pandemic life.
Even if I were to make an offer on a vacation property tomorrow, by the time I'd close on it and start to market it, summer would effectively be over. As such, I see little sense in overpaying for a home right now.
The Millionacres bottom line
Buying a vacation home to rent out is something I'd still very much like to do. But right now just isn't the optimal time, and I'd rather accept that than make an investment I'll later regret.