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With mortgage rates soaring, is it still a good time to invest in real estate?

A family stands in front of their new house
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Record-low mortgage rates in 2020 and 2021 made it an ideal time to invest in real estate, but rates have soared this year.

Those low rates made property affordable at first, but then the market quickly adjusted by raising prices. Now with rising rates and higher home prices, many buyers are finding themselves priced out of the market. The housing market is already taking a hit, as buyers pull back and more supply is still coming online.

So is it still a good time to plunge into the real estate investment market?

6 things to watch as you’re investing in real estate

1. Are you investing to occupy or rent out?

Investing in real estate could mean buying to occupy it or to rent it out. That may sound like a trivial distinction, but it’s important in how you think about your purchase and how it’s financed.

If you’re buying a property because you plan to live there, consider whether it makes sense to actually buy rather than rent. Will you be living in the area long term so that it makes sense to lock up your money in a down payment and pay the closing costs and other transaction fees?

Many experts suggest that you have to occupy the property for at least seven or eight years for it to really start making sense to buy.

If you’re an owner-occupier, you’ll also want to consider how big a house you might need in the future. Will your family expand soon and require more space? It may make sense to buy a bigger house than you need now and then grow into it over time.

If you’re buying to rent out, your considerations are different. It’s about how much money the property can generate. So you need to understand the rental market as well as the expenses of maintaining the property. In addition, you’ll likely have to put more money down, often 25 or 30 percent, than if you were an owner-occupier, where 20 percent (or even less) is common.

“Investors need to be aware of the unemployment in the area of their investment properties,” says David Tuyo, CEO of University Credit Union in Los Angeles. “You obviously want to hedge your bets that tenants will be able to pay rent as much as possible.”

Regardless of which path you go, you’ll want to know how much house you can afford.

2. Rising mortgage rates

Mortgage rates bounced quickly off their historic lows, and now they’re at elevated levels, though still not particularly high relative to history. These rates may make owning a house more affordable than renting one, depending on your circumstances and the area you live in.

“Right now, it may seem like interest rates are high,” says Jeff Busch, partner at Lift Financial in South Jordan, Utah. “They are higher than they have been over the past year or two, but if we look back just a few short years ago, most people were very happy to get a rate in the 5 percent range. Historically, rates rise and fall all the time and who’s to say they won’t continue to rise from where they are today?”

If rates are poised to rise further, then it may make sense to lock in a lower-rate mortgage now. On the other hand, if the Fed’s actions tip the economy into a recession, mortgage rates may be headed right back down. So it could make sense to buy and then prepare to refinance in the near future. In this latter case, it may make sense to go with a no-fee mortgage for now.

3. Home prices surged, but will they come back down?

Low mortgage rates made property initially more affordable but then sent house prices soaring, negating the effect of low rates. Now after a period of low supply helped push prices higher in early 2022, supply is coming back to the market quickly. So will more supply bring the market back down again?

“Right now, the real estate market, when it comes to residential property, is kind of normalizing itself,” says Edward Fernandez, CEO of 1031 Crowdfunding, a crowdfunding site for investment properties. “Sellers who still have a substantial gain are now willing to lower their prices to get a deal done and that’s what we’re seeing. By no means should anyone be worried about prices falling a lot. Are prices falling? Yes, but are they falling a lot? No.

4. Stay focused on the long term

Many real estate watchers point to real estate as a long-term investment, not a short-term trade. And that makes it different from other major financial markets.

“There is never a wrong time to buy a house, or an apartment or land,” says Jessica Levine, a real estate broker at Douglas Elliman in the New York City area.

More circumspect buyers – and those who don’t have to buy today – may be dubious of such claims, however. The market forces pushing prices now rarely last long term. So, real estate investors need to be looking at long-term trends, not just whether the market is hot or not today.

“Trying to time your investment purchase, regardless of if it is real estate, stocks or mutual funds, can be an impossible journey to get right every time,” says Busch. “That’s why I recommend making the purchase when it is right for you.”

“An effective real estate strategy needs to be long- term in focus,” says Ryan Shuchman, investment advisor and partner at Cornerstone Financial Services in Southfield, Michigan. “So when the right investment opportunity becomes available an investor should ideally look at how it will perform, not only in current market conditions but through various market factors over a longer timeline.”

5. Check your financial situation and ability to make payments

A big investment in real estate requires you to have a solid financial position. If you’re owning the space to occupy it, then you’ll want to ensure that you’re able to make the payments, while landlords want enough cash to make repairs and cover a mortgage, if a tenant is unable to make rent payments.

Tuyo suggests it’s a good time to buy if you have job security and find a home you want.

But given the uncertainties of the economy, those looking to invest in real estate can be more conservative in both how they finance property and what kind of property they intend to buy.

6. Make passive investments in real estate

While many people hear the words “real estate investing” and think of high-ticket houses and apartments, investors can also get started in many other ways that offer attractive returns. One of the most popular is by being a passive investor in real estate.

Such passive investing includes buying a stake in a real estate investment trust, or REIT, and using an online platform to invest. Both approaches avoid the headaches of owning and managing physical property, and they offer other advantages, too.

For example, by investing in a publicly traded REIT you can start out with as little as $20 or $30, depending on the price of the REIT. There are no commissions on trading your investments, unlike the substantial fees for real property. Plus, the investments are usually incredibly liquid and typically pay regular quarterly dividends, without you having to manage a property in any way.

(Here are some top ways to invest in real estate, including how to maximize profits on each.)

Bottom line

Despite the uncertainties created by the economic climate, real estate may still prove an attractive investment today, despite rising mortgage rates. But remember that a lot of the value of investing in real estate comes in the long term, holding a property and letting time grow your investment. Investors looking to make a short-term score are often disappointed.

Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
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