Are you planning on buying a residential property with the hopes of getting a greater return in the future?
According to a report by PWC Global, the leading professional services networks in the world, “12 million Americans spend more than 50% of their earnings on their home purchase”. This is astonishing because “78% of U.S. workers are living paycheck to paycheck“. Even if you are financially stable enough to afford the mortgage payments, along with high interest, there are challenges ahead that may make you regret the decision to invest in a residential property.
Here are the 4 Reasons You Shouldn’t Invest in a Residential Property Just Yet
1. It Requires a Lot of Work
“The average homebuyer [takes] 73 days to close on a property after the initial visit to the home” –Redfin
Investing in residential property might seem easy initially. But it’s not. To successfully invest in a residential property, in other words, to make a lot of money in the future, you have to get a lot of things right. First, find a trustworthy real estate agent, then hunt for the perfect home within your budget. Next, hire a property manager. The to-do list goes on and on. Instead of wasting your time, energy and money in investing in a residential property, I would recommend investing in an index fund.
2. Mortgage Rates Could Rise Soon
According to the Mortgage Reports, mortgage rates are at their lowest in September. This is the best time to buy a home. However, the rate is expected to jump higher in October. Mortgage rates fluctuate a lot. To find the right rate for you, you should plan to wait until the right time, when the rates are at their lowest. However, as the rate drops, home prices skyrocket. This is a major reason why investing in real estate is always a gamble. Lastly, as a general rule of thumb, remember that a 4.5-5 % interest rate with 20-25 % down payment is considered moderate.
3. Bad Tenants Can Add Additional Problems
If you are buying a home intending to rent it out until you pay off the mortgage, you might be making the biggest mistake of your life. Especially, if you can’t make the payments on time yourself. There have been countless cases where a landlord had to evict a tenant due to bad behavior or for performing a criminal act. Not all tenants are financially stable enough to pay their rent on time. How are you planning to make the mortgage payment if you don’t have the rent payment in your hand at the end of every month?
4. You Could Lose Your Property if a Recession Were to Hit
A recession only affects those homebuyers who borrow more money than they can afford. What would you do if you were to lose your job due to the recession? How will you make your monthly house payments? It’s a whole different ball game if you are buying a house by selling one of your assets or if you have a source of income capable of withstanding the heavy blow of the recession.
If you still want to invest your hard-earned money in a residential property, make sure you hire a good property manager. A good property manager will make up for your lack of experience in managing properties and are generally pretty essential when you have more than one property.