If owning where you want to live isn’t going to work, you can invest in residential property elsewhere
By Michele Lerner | The Washington Post
More than three decades ago, Doug Benner bought a residential investment property in Germantown, Md., while he lived in Olney with his mother.
“I was with the State Department at the time and moved around a lot, but I wanted to own real estate,” said Benner, now a senior vice president of residential lending at Draper and Kramer Mortgage Corp. in Reston, Va.
Today, many renters who aren’t looking to buy a place to live will blame high housing costs or say they don’t anticipate living in the area long-term. But building wealth through real estate is still an appealing idea, industry leaders said. And buying in a housing market with lower costs — either a vacation home or an investment property — is a viable option for someone with a good salary and good credit.
With mortgage rates and home prices rising, the share of houses purchased by investors nationally has remained stable for two years, according to CoreLogic, a real estate analytics firm based in Irvine, Calif. Investors purchased 24 percent of all single-family houses in July 2021 and 26 percent in June 2023.
“We’re seeing a trend of people buying a second home first, particularly during the pandemic when younger buyers who were priced out of their home markets began buying more vacation homes,” said Daned Kirkham, senior director of real estate for Vacasa, a company based in Portland, Ore., that manages vacation rental property. “More people are seeing real estate as an asset class they want to own, plus, if they can own a place where they can work remotely or vacation in and still earn some rental income, that can be a good way to diversify their investments.”
A lot of that money is flowing from high-cost to lower-cost markets, according to Suresh Srinivasan, chief marketing officer of Roofstock, an online marketplace for single-family rental home investors that has its headquarters in Oakland, Calif.
“We’ve found that more consumers, especially those who rent in high-cost areas such as San Francisco, New York and Los Angeles and earn a significant salary, are investing remotely in places with lower housing costs such as Indianapolis and Tampa,” Srinivasan said.
Investing in real estate is still far less common than investing in the stock market, said Doug Brien, chief executive and co-founder of Mynd, a platform to buy, sell and manage single-family rental houses that is also based in Oakland. “About 158 million people invest in the stock market, while only about 10 million own real estate as an investment,” Brien said. “Among real estate investors, 85 percent own property within 60 miles of where they live. But with tech advances, it’s a lot easier now to invest in the best markets all over the U.S. rather than stick close to home.”
While attention has focused in recent years on the growing number of single-family houses owned by large-scale investors, most single-family investment properties (75 percent in 2021) are owned by individuals who own fewer than 10 houses, according to the Joint Center for Housing Studies at Harvard University.
Financing a second home
Whether you want to buy a house as a vacation property or an investment property to rent, unless you have the cash to buy the property outright, you’ll need to consult a lender about financing options.
The interest rate on a second home’s mortgage is about 1 percent higher than the rate for a primary residence, Benner said. In addition, most lenders require a down payment of at least 20 percent for a second home.
If you don’t live at a property as your primary residence, it’s considered a “second” home, he said. Lenders view loans on second homes as a higher risk because borrowers who default on a second home can continue living in a primary residence.
How to choose a second home
As with any real estate purchase, you need to identify your goals and budget before shopping. “Ideally, you want to buy a place in a market where the rent will cover the mortgage and the value is rising,” Benner said. “You’ll also build equity as you pay down the loan, so eventually you’ll have an asset to borrow against or to sell.”
Some buyers focus on cash flow and look for a property with a solid rental history, Benner and other experts say. Others are more interested in holding the property long-term and building equity. Short-term rentals for stays of from a night to a few weeks can be lucrative, but they come with additional rules and risks.
“If you plan to use your investment property for short-term rentals, make sure you check city ordinances and the homeowner association or condo association rules, because many places won’t allow them,” Benner said.
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