When interest rates rise, people tend to get nervous. Those thinking of buying or selling real estate may wonder if they should wait for things to “cool off.” They may wonder if they will get a better deal if they hold off until “things” are better down the road. However, during inflation, real estate becomes a safety net.
Rancho Santa Fe real estate has traditionally been a good investment. It is an equestrian area with a resort lifestyle in a peaceful community. The acreages, golf course communities, and privacy provided by the real estate in Ranch Santa Fe secure their long-term value, even during inflation and rising mortgage rates. Here is why.
Real estate as protection against inflation
Real estate, as an asset, outperforms other investments during inflationary times. Real estate will always increase in value, sometimes more than others. Even after the famous crash in 2008, real estate values were back up to pre-crash prices in less than ten years. Owning your home gives you a shield against inflation. Prices of other goods and services may rise, but your mortgage stays the same while your equity grows.
The prices of homes increase during periods of inflation. This is good news for those who own real estate. Their equity is growing even though their mortgage payments stayed the same. If they decide to sell, they will gain more from their current home, offsetting the higher value of the home they buy. Currently, homes for sale in Rancho Santa Fe are in the $860 per square foot range.
First-time home buyers are most affected by rising home prices. They may have to wait a little longer and save a little more before purchasing a home, which means they will be renting longer. This is good news for landlords. In addition, when inflation rises, so do rent rates. This is a great time to invest in rental properties. The demand is increasing, and the rising rental rates ensure a good return on the investment.
How to know if you are ready to invest in rental property
You have enough in savings
A good rule of thumb is to have 30%-35% of the intended purchase price of the home in savings. This allows for 20% down on the property while leaving cash for repairs and expenses. The house could be empty for three months at a time, so you will want to have enough savings to cover your expenses. Even if you find a renter right away, they will need to provide their current landlord with a 30-day notice, and they will need time to pack up and move.
You stay focused on the numbers
When it comes to real estate investing, it is all about the numbers. Whether your properties are used for short-term or long-term rentals, staying focused on the numbers will ensure you find and keep high-quality renters.
Here are some guidelines:
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1% Rule: If you set your rent rate at 1% of the purchase price, you can cover your mortgage with the rent payments.
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50% Rule: Half of your rental income will be spent on maintenance, insurance, taxes, and other operating expenses.
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Rule of 72: To determine how quickly you will recoup your investment, divide your fixed annual rate of return by 72.
There are tax benefits to investing in real estate. You can deduct some of your operating and management costs, such as advertising, maintenance, and utilities. You may also be able to leverage the investments to reduce your taxable income. Be sure to talk with your accountant to understand your benefits. If you use your assets properly, you gain all the tax benefits.
You understand the responsibilities
Even if you use a management company to help you manage the renters and upkeep, becoming a landlord is a commitment. Take the time to research and talk with other landlords and your real estate agent to understand your responsibilities clearly. Owning rental properties can generate a solid revenue stream, even during inflation, if you are prepared and manage them well.
Mortgage rates and inflation
Long-term mortgages are somewhat protected from short-term inflation. The Fed controls short-term rates, which directly impact car loans, personal loans, credit card rates, and other short-term loans. Mortgage rates tend to follow the 10-year Treasury, where rates rise slowly. Banks compete against each other for mortgage loans, which also helps to keep rates low.
The interest rate for 30-year loans has been below 10% since 1971, minus a short-term spike in 1981. Those new to the real estate market may think the rise of interest rates from 3% to 6% is a problem, when in fact, the 3% rate during the Pandemic was an anomaly. Current interest rates will not hinder real estate investment even if they rise a little more. The rush to refinance, though, will slow down.
It isn’t all about inflation
Nationwide, we are experiencing a shortage of single-family homes. The shortage drove the price of homes upward while interest rates were falling. Supply and demand have an immediate impact on the real estate market. Home values may continue to increase until demand falls or supply increases. When supply starts to meet demand, home values will become steady.
The most important reason to invest in real estate
Nothing can take the place of home ownership. Living in a home you own, as opposed to one you rent, has immeasurable benefits. Confidence comes with home ownership. There is joy in the ability to build, remodel, decorate, and use your property any way you wish. Owning a home provides financial stability. It increases your net worth and provides equity you can leverage for further financial growth. Homeownership offers freedom and stability that you can enjoy anytime, no matter the mortgage rates or if we are in a period of inflation.
Are you thinking about investing?
Sonja Huter is happy to answer your questions if you are considering real estate investing. She is an award-winning real estate agent with a broad range of skills to help home buyers, sellers, and investors in the San Diego Coastal Area.