Should You Buy a Rental Property Right Now?

There’s a reason so many investors are drawn to purchasing rental properties: With rental homes, you get to make money two ways.

First, there’s rent itself, which can serve as a steady income stream. You may be able to charge enough rent to more than cover your monthly property ownership costs, leaving you with a nice profit on a regular basis.

Then there’s home price appreciation. Properties have a tendency to gain value over time, so if you purchase a rental property and keep it for many years, you might land in a position to profit nicely.

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But today’s housing market is a tough one to crack — even if you’re a seasoned real estate investor with a decent chunk of capital to spend. And so you may be wondering if now’s really a good time to purchase a rental property. Here’s what you need to know.

The upside of buying a rental right now

These days, home prices are through the roof, while mortgage rates are higher than they’ve been in well over a decade. That means a lot of people simply can’t afford to purchase a home right now. If you buy a rental property, you can capitalize on strong rental demand and potentially get away with charging tenants a premium.

Furthermore, some real estate investors have enough capital to avoid having to finance a home with a mortgage. If that’s the boat you’re in, higher borrowing rates won’t be an issue.

The downside of buying a rental right now

The housing market factors that are making it harder for everyday buyers to purchase homes also apply to investors. If you buy a rental home today, you’re apt to pay a premium to purchase it — especially if you have to duke it out with other buyers for the same property.

Plus, because housing inventory is so limited these days, you may not find a home that checks off all the right boxes for you. Say you’re eager to buy a rental property in a college town. You may have to go a few blocks outside your desired radius due to a lack of inventory. And that could make it harder to find tenants, or tenants who will pay the monthly rent you’re hoping to charge.

Finally, if you’re hoping to finance your rental property with a mortgage, you’re going to pay a lot more today than you would’ve a year ago. And that’s an added cost you’ll need to consider.

What’s the right call?

Because so many people are looking to rent homes right now, it’s a good time to be a landlord — but only if you can snag a rental property at the right price. That’s an iffy proposition these days, so you may want to hold off on buying a rental and put your investment dollars to work in another way.

Right now, stock values are down across the board, so there may be ample opportunity to load up on quality REITs (real estate investment trusts) at a discount. And while owning REITs isn’t the same as owning a rental property, some benefits are similar.

Instead of collecting regular rental income, with REITs you can instead collect steady dividends. Plus, just as properties have a tendency to gain value over time, your REIT shares can also appreciate nicely in value. Therefore, you may want to look to REITs until the housing market cools off.

The Motley Fool has a disclosure policy.

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