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The Big Move: ‘Should we wait to see how the market plays out?’ I want to purchase a rental home. Is this a good time?

Dear MarketWatch,

Is it a good time to buy an investment home to rent out, or should we wait off on it?

We live in Arizona, but the home I’d be buying is located in El Paso, Texas. It would involve taking out a mortgage loan with a 3.5% interest rate. The home would be a newly-built, single-family home, with four bedrooms and three full baths.

I would be landlord with the help of family in Texas as well. I just don’t know if it’s the right thing to do now. Should we wait to see how the market plays out for another year or so?

Sincerely,

Eyeing El Paso

The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.

Dear Eyeing,

There are many reasons why people should be hesitant about testing the waters as a real-estate investors — and trying to time the market is just one of them.

As Tess Zigo, an advisor with LPL Financial, smartly points out, “Nobody can predict the housing market and where prices go from here.” Look at the past two years. At the start of COVID-19, it seemed like the bottom had fallen out from the housing market as sales activity came to a screeching halt. Just months later, Americans flocked to buy homes in droves, driving prices up to record highs across the country.

There is reason to believe that the market may be reaching a top, but it’s important to note that most economists don’t expect prices to fall like they did after the housing bubble that formed in the early 2000s. Instead, most anticipate that rising mortgage rates will simply slow the pace of home-price growth.

Buying a home as an investor is about being prepared for the worst-case scenario. Presumably, since you’re talking about buying a home to rent, you’re planning to be in this for the long haul. If prices were to drop, you would be fine so long as you can continue to make your monthly mortgage payments. It’s only if you needed to offload the property in a down market that you’d encounter trouble.

“ Too many people see real estate as a guaranteed investment ”

— George Gagliardi, founder of Coromandel Wealth Management

“If there was a need to sell the property in the next five years, getting back the original investment could be problematic, after factoring in transaction fees,” said George Gagliardi, founder of Massachusetts-based financial advisory firm Coromandel Wealth Management. “With interest rates rising, there will be many more challenges to finding willing buyers later on.”

The bigger question I think you need to answer — rather than worrying about timing the market — is why you want to get into real-estate investing in the first place. The past couple years aside, the long-term average rate of home-price growth is lower than the return on the stock market.

And growing your money through the stock market is generally a less time-intensive pursuit. You mention that family would look after the home for you, but mixing family with business is a tricky feat. Do these family members have the free time to devote to the emergencies that inevitably arise? Are they expecting a cut of the profits? Would they be willing to deal with a nightmare tenant?

And if, down the road, your family members suddenly became unable to manage the property for you, would you be prepared to travel to El Paso regularly to pick up the slack?

To be sure, there are other ways you could diversify your portfolio than buying a rental property. Gagliardi, for instance, suggests looking into buying shares of publicly-traded real-estate investment trusts.

“Too many people see real estate as a guaranteed investment. It isn’t, any more than other investments,” Gagliardi said. “It could end up being a great diversification move on their part, or it could be an incredible time and money sink for them. They need to be prepared for the latter possibility.”

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