Most investors know the basic premise for success: “Buy Low and Sell High.” Seems simple, but in practice it is not. In real estate, we really don’t know the best time to buy until years past the purchase, when we see if purchase prices have gone up or down.
Savvy investors look at certain market indicators to help increase their investment success. However, we are in an extremely unusual market. Even though prices are high, it actually may be a good time to buy. Here’s why.
This economic downturn is different
Unlike previous recessions, the source of the current recession is not financial. The last recession, from December 2007 until June 2009, was created by the financial and real estate industries. The crisis was fueled by mass approvals of subprime mortgages coupled with lax lending standards. Cause of the Regan-era recession, from July 1981 until November 1982, is pointed at the Federal Reserve’s monetary policy, which raised interest rates to curb high inflation.
The current recession was caused by a public health crisis. As a side note, the Fed has committed to keeping interest rates low, for now.
There are some sectors of the economy that were not impacted by the pandemic, or are even seeing growth.
Regardless, Covid-19 shut down the U.S. economy very quickly. It is uncertain how rapidly things will rebound. “This is not a typical economic crisis,” says Cecilia Rouse, an economist and the dean of the Woodrow Wilson School of Public and International Affairs at Princeton University. Most economists believe the economy is fundamentally strong. However, Rouse added the longer the coronavirus pandemic affects daily life and the longer the U.S. is not able to bring the virus under control, the more damage it will do to the economy.
High demand for housing will keep prices stable (or rising) in Otter Tail County and the surrounding region.
Interest rates are low
Even though home prices have risen, the low cost of borrowing means there are still some good deals out there.
For example, a home that previously sold for $700,000 at 4% interest would cost $1,203,087 over the life of a 30 year loan. $200,000 at 4% interest would cost $1152 per month.
That same home in today’s market with a list price of $250,000 at 2% interest would cost essentially the same– $1,155 per month.
For those that qualify, low interest mortgage loans mean all the difference when evaluating an investment.
New Construction Property Tax Rebate Program
As part of The Big Build, Otter Tail County has approved a program to encourage new investment and construction of single and two-family homes. The goal is to open up lower value, existing home stock to new home buyers, increase the tax base through a rebate of property taxes on newly constructed homes, and inspire people to replace dilapidated housing structures within the county. For more information, please review the full program guidelines.
- Approval must be received before construction begins
- Rebate of the County’s portion of the property tax, along with the City’s portion in participating cities (currently Battle Lake, Fergus Falls, Henning, New York Mills, Ottertail, Parkers Prairie, Pelican Rapids, Perham, and Vergas), based on the increase to real estate taxes as a result of building a new home
- Provides up to $10,000 in rebate in five years ($5,000 throughout the county plus $5,000 if residence being built is located within a participating city)
- Primary residences only (no seasonal owners)
- Rebate paid to the owner of record in December of the year, transfers with the sale of the property
- Applicant can be the future homeowner or the builder/developer
There may be more foreclosures
It is not pleasant to think about profiting from someone else’s struggle, but someone is going to buy that foreclosed home, and it might as well be you. We are still waiting to see the volume foreclosures that may come about once mortgage default moratorium and forbearance programs come to an end. Though the programs have been working so far—helping homeowners keep their property after leaving programs—the ones still receiving help into 2021 may be more vulnerable. This could cause a rise in distressed properties or bank-owned sales.
Higher than normal rental prices
Some homeowners sought to cover increased expenses by raising rental prices, some just followed the market with their increases. No matter the reason, higher than normal rental prices coupled with high demand create a good ROI opportunity for investors.
However, just like selling a home, overpricing your rental or showing it in poor condition could mean it sits on the market. Investors are wise to hire a qualified realtor to assess the market and advise on potential rental property for sale. With inventory low, it is a good idea to contact our office so we can let you know immediately if something comes up that fits your criteria.
Is Now a Good Time to Buy an Investment Property in West Central Minnesota?
Under most circumstances, real estate increases in value over time and outperforms other investments. Investing always involves risk, but there are certainly some promising indications, such as low cost borrowing and tax incentives, that point toward a good time to purchase real estate.