When it comes to investing in real estate, there are different routes you can take to make money. And one option is to purchase a home that you rent out to tenants.
Many real estate investors do quite well for themselves owning rental properties. And if you're willing to put in the work, you may find that owning a rental is a financially rewarding experience.
But given the state of the housing market, you may be wondering if now is a good time to add a rental property to your real estate portfolio. The answer? It depends.
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Why it's not the best time to buy
These days, home prices are up on a national level due to strong buyer demand driven by a lack of inventory. In fact, as of late May, there was a mere 2.6-month supply of homes on the real estate market, per the National Association of Realtors (NAR). It would likely take a minimum of a four-month supply of homes to significantly cool the market off.
In fact, anyone who buys a home today should expect to pay premium prices, and that extends to investors looking to purchase properties to rent out. The NAR reports that May's median existing home sale price came to $407,600, a 14.8% uptick from the previous May. It also marked 123 consecutive months of year-over-year increases.
Compounding the problem of higher home prices is expensive mortgage rates. After sitting at competitive levels from mid-2020 through late 2021, mortgage rates have been on the rise this year. And so if you can't pay cash for a rental home, you should expect financing it to be expensive.
Why it is a good time to buy
While you might pay a lot more money these days to purchase and finance a home, the upside of buying today is that rental demand is strong. Right now, the U.S. job market is solid, and that means more people can afford to rent a place of their own.
Also, homes have clearly gotten very expensive to buy, which means many people have no choice but to rent in the absence of being able to afford homeownership. As such, if you buy a rental property today, you might manage to command a lot of money in rent from your tenants -- money that can help you recoup your outlay.
What's the right call?
If you don't have a lot of capital to work with, now may not be the best time to purchase a rental property. But if you're willing to be a little patient, you might do well buying a home you rent out at a time when tenants have no choice but to pay up. Think about your personal finances and goals to arrive at the best decision for you.
If you're hesitant to tie your money up in an asset like a rental property, you might look at buying REITs (real estate investment trusts) instead. The upside there is getting to invest in real estate without having to do the work of a landlord or plunk down a huge sum of cash up front.
