Regular listeners of my show will recall that I have been an avid real estate investor for several years. I took a brief hiatus from investing around 2008 when I realized the housing market was heading for a massive crash, selling off all my rental properties. I waited out the economic uncertainty of the next couple years before I began acquiring new properties, and I am now under contract with my fifth property. Clearly the current rental market offers a golden opportunity for savvy investors, but surprisingly few people understand how to take advantage of it!
Real estate has always been a smart investment, but it’s only been within the last seventy years or so that the financial tools necessary for such investments have been accessible to everyone, namely through long-term financing by Fannie Mae and Freddie Mac. Home-ownership rates in America are among the highest in the developed world, and this is largely thanks to relatively easy access to such products as 30-year mortgages that just don’t exist in most countries. Therefore, the United States offers everyone the opportunity to not only own their own home but to start acquiring rental properties, too.
This has been true for several decades, but it’s only within the last few years that the disparity between renting and owning has become so severe. The return on investment is almost immediate, and allows for instant cash flow and long-term equity building. It used to be that rental income would help offset a mortgage or, at best, help one break even throughout the duration of mortgage. But with interest rates so low, home prices relatively depressed, and rental prices continuing to climb, it’s very common for properties to command rental prices that are higher than the cost of the mortgage!
Why is this, exactly? It’s because every relevant trend since the housing market collapse of 2008 has been conducive to depressing house prices and driving up the cost of renting. Among them:
- Housing prices collapsed and took years to recover. Many places are still below their 2008 highs, and those that have recovered are only marginally higher than they were seven years ago.
- Interest rates are hovering around historic lows. With slow-downs in China, uncertainty in Japan, and perpetual chaos in Europe, the US Treasury is in high demand, which drives interest rates down.
- Many homeowners foreclosed during the financial crisis and have not recovered sufficiently to qualify for a new home. This has increased the number of renters, even has the supply of housing remains constricted.
- Young people are graduating with massive amounts of debt. Many cannot qualify for a home because their incomes are relatively low and they have tens, if not hundreds, of thousands of dollars in debt.
Because none of these trends seem likely to reverse in the near future, the rental market will remain robust and the homeownership market will remain incredibly lucrative. This will be a continuing topic on the show, and I will also be hosting regular, free classes on the subject in person at the Garvens Mortgage Group offices in downtown Colorado Springs. As there’s no telling when interest rates will begin an irreversible trend upward, it’s imperative to take advantage of the present opportunities as soon as possible!
3-14-2015 Grand Illusion: Renting vs. Owning