With all the upheaval caused by the coronavirus pandemic, now might not seem like the best time to buy any type of real estate, much less an investment property or second home. But don’t rule out the idea completely.
“With historic low rates, it is a good time to consider investing in real estate,” says Victoria Shtainer, a real estate agent and expert at Compass in New York. “Low rates give you more buying power, and we have been negotiating amazing deals for our buyers.”
Mortgage rates are expected to drop again after the Federal Reserve’s recent rate slash, which was intended to protect against the economic impact of the pandemic. That means that it may be time for buyers to consider an investment property. Here are some reasons to go for it.
Why people are considering buying
The lowest interest rates in nearly 50 years, and the potential for a recession, which could lower home prices, have attracted the attention of buyers.
“Given the current volatility in the stock market, investors are reassessing asset allocations in their portfolio, and considering how real estate may fit into this from an asset allocation standpoint,” says Shtainer.
She says the current environment, with low rates and a good selection of inventory, has given investors the upper hand in negotiations.
“More people are looking to real estate as their next investment, because of the potential for both appreciation and cash flow,” says Jennifer Anderson, of Anderson Coastal Group in San Diego. “It’s also a real, tangible item that can provide more control than other forms of investment.”
Benefits of buying an investment property
An investment property can be a valuable asset and a good way to generate passive income, and it might also provide tax write-offs and incentives that you wouldn’t get on other instruments, experts say.
“We always recommend speaking to your qualified tax adviser on your particular situation,” says Shtainer. “However, generally speaking, there can be tax benefits to owning an investment property. This can be via the tax benefits that mortgages provide, as well as the IRS’ treatment of your investment/vacation home, depending on how you rent it out.”
Anderson says that holding a property with the potential for appreciation and cash flow is a huge advantage of buying an investment property. It also diversifies your investment portfolio and protects your net worth while the market goes up and down.
Precautions to take before buying
Buyers should prepare, however, for the possibility of a prolonged economic shutdown. If you’re buying a property that doesn’t currently have tenants, it might be a while before you can find any.
That’s why the most important thing to have on hand before you buy an investment property is cash, says Nick Clements, general manager of Mortgages at LendingTree.
He says that because investment property owners will be responsible for repairs and maintenance, for tenants not paying rent on time, or for the time that might elapse between tenants, they need cash to cushion any bumps in the road.
He also advises buyers to research the appropriate legal vehicle, typically an LLC, with sufficient insurance in place.
“I strongly encourage an umbrella insurance policy. If a tenant gets hurt in your property and decides to sue, you will want to ensure you have the right structure and insurance in place,” says Clements.
To get a better sense of how much rent you might be able to collect, Anderson recommends reaching out to commercial real estate brokerages in the area and asking for historical rental rates for the last 10 years.
“That can give you a good snapshot on how market recessions or booms could impact your earnings or property value,” he says.
How to determine affordability
You don’t have to be a millionaire to invest in property or a second home. To determine whether you are ready to buy, Clements recommends asking yourself two questions.
“Are you cash-flow positive, and could you handle six months without receiving rent? If you can’t answer yes to both of those questions, now is probably not the right time to buy an investment property,” he says.
Shtainer says that buyers should be prudent, just as they would be with their primary residence. She advises that if you’re not buying the property in cash and will need financing, you should make sure you get pre-approved.
Pre-approval will tell you how much the lender is willing to give you for the purchase of your second home.
“Understanding your budget and sticking to it is very important, especially when making an investment,” says Shtainer.
She says that buyers should do their due diligence to ascertain what they can afford, and she suggests they partner with a broker in their market to make sure they are purchasing a property at a favorable market value.