Making money as a real estate investor often boils down to buying properties at the right price and either flipping them at a profit, holding them until they appreciate in value, or renting them out. But these days, finding an underpriced home is a difficult task.
Thanks to the coronavirus pandemic, home listings have declined substantially in 2020, to the point they've been down 32.5% compared to the previous year. This limited supply has helped drive up prices, but that's not the only reason it's been a seller's market this year.
Mortgage rates have been unbelievably low in the wake of the pandemic. Since summertime, the 30-year fixed mortgage has averaged well under 3%, and in mid-November, it dropped to 2.72% -- the lowest level on record in almost 50 years, according to Freddie Mac (OTCMKTS: FMCC). As a result, buyers have been clamoring for homes, driving up values even more.
These factors therefore beg the question: Does it make sense to add residential properties to your real estate portfolio now? Or should today's inflated prices be a turnoff despite the opportunity to snag a low mortgage rate?
Why low mortgage rates aren't enough to make today's homes worth investing in
If you're aiming to buy a home, hang onto it for many years, and watch its value increase, you may end up waiting a long time for that to happen. As of September, the median home price was $45,600 higher than it was just nine months prior in January. That's a huge jump in such a short period of time, and it's also more indicative of temporary market inflation than anything else. As such, the "buy and hold" strategy -- a popular one for stocks and real estate investment trusts (REITs) -- may not work so well in today's housing market.
Investing in a residential home to rent out may also prove tricky. While homebuyers these days may be willing to pay a premium for available properties because they get something in return -- really low mortgage rates -- renters are less likely to be willing to pay up. As such, if you pay a lot more for a home right now than you normally would, you can't count on charging more rent to make up the difference.
Finally, if you're aiming to do a quick fix and flip, you'll ideally buy a home, renovate it, and sell it quickly. In that scenario, a low mortgage rate does very little for you. Besides, house flippers typically don't take out traditional mortgages to finance home purchases anyway. Rather, they generally turn to hard money lenders or private real estate loans, given their timelines.
The Millionacres bottom line
As such, even though mortgage rates look really appealing, they don't make a particularly compelling case to buy residential properties for investing purposes right now. Of course, buying a home for personal use is a different story. Today's prospective homeowners have a lot to gain from today's mortgage rates. But from an investing standpoint, the residential housing market is just too inflated to constitute a good deal. Sure, there may be some individual markets that are outliers, but for the most part, low mortgage rates don't make the case for buying up residential properties today.