As a financial asset class, real estate is known for its stability and lends itself well towards long term wealth building strategies.
Yet, in the last year, the real estate market has gone to the moon. Housing market prices have surged a mind boggling 19.2% over the past year. We have not seen this kind of increase since 2008. That year, housing prices jumped by 14% leading up to the housing bust. The remarkable price increases we see today are being driven by lack of housing inventory, low mortgage rates, and a flood of new buyers coming out of the pandemic.
All of this is to say, today’s housing market is not exactly friendly to the new real estate investor.
To make matters worse for investors, the Federal Reserve is increasing interest rates to fight rising inflation. This is bad news for real estate investors financing their investment with a mortgage or other loan. Higher interest rates mean they will have to pay significantly more over time on loans.
So, unless you have enough money to put a significant amount down on physical property, you may want to consider other avenues of real estate investment.
Fortunately, opportunities still exist in this crazy real estate market to make profitable investments with a small amount of money.
Investing in REITs is one option to avoid the headaches of buying property in a sizzling real estate market with rising interest rates.
REITs use your money to purchase and manage properties, saving you the trouble of having to do it yourself. Many established REITs exist that offer consistent, quality returns and are legally obligated to annually pay out to shareholders in dividends.
REIT shares are much easier on the wallet than property in today’s real estate market, with some entry level shares starting at $100 or less.
Relevant for today’s economy, established REITs have shown resilience against inflation and recession as well.
Buying REITs is a solid option if you’re looking to add real estate to your portfolio without having to delve into today’s chaotic, expensive real estate market.
Crowdfunding platforms are also a great alternative.
More so than REITs or private equity funds, crowdfunding is the cheapest way to get into real estate investment. Some equity crowdfunding platforms have basic investment options starting at $10.
Crowdfunding is set up so that groups of investors can pool small amounts of money to purchase costly high-quality assets. Contributing investors get an ownership stake in the investment venture, unlike REITs. Command of this stake gives investors rights to a portion of the venture’s profits.
If you aren’t in a strong position to purchase property in the current market, crowdfunding platforms provide profitable real estate investment options with a private equity-like experience.
The Federal Reserve is issuing interest rate hikes not seen since 2000, which does not bode well for borrowers.
Higher interest rates mean borrowers will have to pay more in the long run for loans taken out now.
While higher interest rates fight inflation, they also create a poor environment to buy property in.
The bottom line:With rising interest rates and inflated real estate prices, borrowing money for a real estate purchase right now will likely cost you more in the long run.
While notoriously hard to predict, some analysts expect the real estate market to cool as sellers will have to lower prices as high rates and prices will reduce buyer demand. The simple economics of the situation suggests that prices in the market will have to eventually fall to meet consumer demand if buyers are unable to pay the current high rates and prices.
If this is the case, it may be in your interest to hold off on purchasing property until prices fall and, in the meantime, look to invest in options that do not require financing, such as REITs or Crowdfunding.
For more info on REITs, crowdfunding, and new Birgo projects, stay tuned to Birgo Insights.