A lot of people, recently, are claiming that the real estate market is on fire! So, it’s equally likely that many of you are now asking yourselves: Is it a good time to invest in real estate? Should I invest? Should I buy a rental property? Will there be a crash?
I’m going to tackle these questions by breaking down a few factors that we look at, as well as give you a few tips along the way. Let’s dive in!
The Cromford Market Index: a great predictor of what’s going to happen to prices in 2021.
The Cromford Market Index measures the balance of supply and demand in the residential resale market. If the values fall below 100, the market is favorable for buyers. If they’re over 100, you’re looking at a seller’s market. We review the Cromford index a lot, and if you follow my videos often you know that I create a lot of real estate market update videos on our blog.
The black line on the chart (the “market index”) shows you how hot the market is, making it a very strong predictor of appreciation. When the market index goes up, the prices are assumed to follow. On the other hand, when it goes down, prices are likely to follow.
The Cromford Market Index is a great tool for predicting what’s going to happen to the prices of properties and I recommend you check it before buying. At the Gluch Group this is something we always use to help our buyers find great properties for sale in Coronado and the surrounding area.
There’s an expected upward trend in appreciation this year.
The rental market is following the same trend as the sale market, with dollars per square foot increasing proportionately in both markets. This means it’s very expensive to rent and buy properties right now.
If you buy a property without paying full cash, your mortgage would be higher because interest rates are higher. On the other hand, if you buy a property with full cash payment it should yield you a positive cashflow because you don’t have to contend with the higher mortgage rate. The more upfront money you put down, the lower your mortgage payment is, and the better your cashflow. But that’s not realistic for most people. It’s more likely that you’ll have a mortgage, and keeping that in mind, it’s more likely that while you may get some bonus to your cashflow, it won’t be a huge bonus.
Rental rates are also going to keep going up.
Buying a property and renting it out is going to yield you a better positive cashflow. Appreciation in Phoenix and San Diego for homes is about 18% this year. Let’s say you buy a $300,000 house. You put 20% down to buy the house, which is $60,000. It appreciates by 18%, which means $50,000 in a year. That’s almost a 100% percent return on your money (the initial 20% you put down for the house). If you can afford to put down the initial capital, it’s a worthy investment to try this year.
The other benefit of renting real estate is tax benefits. The upside part of owning a rental is you can write off depreciation and expenses. Furthermore, depreciation is the deduction for people investing in real estate because it reduces taxable income but not the cash flow.
Things can go wrong.
Now there are downsides, and this is one of them. One to keep in mind is home costs, such as maintenance. Things can go wrong. Stuff breaks. Floods happen. You need to invest with the financial risks of owning a rental property in mind. A good home warranty can compensate for this, especially if you have a limited amount of funds to dip into in case of an emergency. It would be wise to put 5% of your gross revenue toward a fund for when things go wrong. Just like if you’re bringing in a thousand bucks, you typically take 5%, $50, of that $1,000 into your emergency fund, it’s the same logic. This also applies to market corrections. The last thing to consider here is that there is a difference in cost and maintenance with a short term or vacation rental property vs a long term rental property. We just recently did a deep dive on this very topic, check out the video here; Vacation Rentals vs. Long Term Rentals: A Guide to Investing in San Diego Real Estate
Is there a risk of a market correction?
Are we in a bubble? We have done a lot of videos on our blog about market conditions and trying to keep you informed and watchful of a bubble, including COVID related real estate news. The short answer right now is that we simply don’t see this market slowing in the short term, the conditions just don’t add up to creating a bubble scenario. However longer term the market will eventually slow to a more reasonable 3-5% yearly appreciation.
You need to put 20% down to buy a rental property.
If you’re looking for a decent rental property, Phoenix offers about $300,000, while San Diego is closer to $450-500,000. You’ll need to figure out how to track down that cash, which is going to be, for many, challenging.
On the one hand, I think buying a rental property is a fantastic idea for this year! Don’t be afraid to try it. It’s going to be worth it, if you can afford it. This is the hottest real estate market we will probably ever see. If you can ride the train, by all means, ride it. But be prudent. Don’t kill yourself. Don’t spend every penny you have and make sure you have a sufficient margin in case of something unexpected.
No matter what you decide to do, we’d love to help you out. Our real estate team is in San Diego and Phoenix, and we are very experienced at helping people find rental properties. Reach out, let me know how we can help you get started on your first, or maybe tenth, property. Either way, Gluch Group would love to help. Reach us at gluchgroup.com or call and text us at 480-378-6700. You can also send us an email at firstname.lastname@example.org.