Is Now a Good Time to Get Into Property Investing?
Is timing really everything with real estate investment deals? Consider these four factors when deciding if now is a good time to get into property investing.
When it comes to the importance of timing and making money, property investment is similar to other kinds of investing, however investing in real estate over stocks has different advantages. The year 2021 holds its share of uncertainties, with the country and world grappling with what a post-COVID world might look like. It’s natural to ask how this particular time affects real estate investment. Here are four things to consider when making decisions on when, where, and how to invest in real estate.
1. The health of the economy and how it relates to the housing market
As 2021 winds down, the U.S. economy has strengthened, despite bumps in the road thanks to the Delta variant of the COVID-19 virus. The biggest obstacles to the economy are a shortage of labor and supplies. Even as the housing market saw home sales fall in August 2021, the housing market continues to bolster the economy. The Federal Reserve continues to keep interest rates low with a rate hike possibly coming in 2022.
Likewise, the terrain looks promising for the real estate market in general. The one downside for investors is that with relatively low inventory, home sale prices are up. This puts a strain on affordability for investors looking to buy and create income either through renting or fixing and flipping. That said, with today’s low interest rates, it’s important to consider that your overall monthly debt payments may still allow you to make money on your real estate property investment. Especially because when people can’t afford to buy homes, they turn to renting. For an investor, a larger rental pool can be a good thing, as long as the local economy can support market-rate rental prices.
2. Your personal financial situation and interest rates
No matter the state of the economy and market, as an investor you want to be on solid financial footing. Ideally, that’s a place where you either have the cash to plunk down on an investment property or you have access to low interest financing. Since home prices have been rising, you may have equity on a property you own that you can pull out to invest in a traditional property.
If you’ll be using financing, take a look at interest rates when thinking about timing on property investment purchases. Today’s historically low mortgage rates can mean that it’s easier to generate income off a property because you’ll be paying less in interest. Of course, you may choose other types of financing, such as hard money loans or private financing. No matter which type of financing you choose, the lower your interest rate, the higher your potential return.
3. Property investing = location, location, location
You didn’t think you were going to escape the one ruling tenant of real estate — location — did you? When considering if now is a good time to get into property investing, you want to carefully review the location in which you want to buy. Location is important when you consider what area or city you’ll be investing in — such as one of these top 10 markets in a post-covid environment, identified by the National Association of Realtors.
Even with many U.S. jobs going remote, renters still want to live in homes that offer access to the things they find important and make their work and play lives easier. Among the considerations are (1) the accessibility of public transportation (2) the access to freeways for commuters (3) the walkability of the area and its nearness to cafes, restaurants, parks, and grocery stores.
You also want to look at individual neighborhoods and streets. Are you investing in a neighborhood with growth potential? These types of locations tend to bring greater returns. Does the type of home you’re buying appeal to the type of person who lives or wants to live in the area? For instance, a one-bedroom house in a neighborhood full of young families may be harder to rent than a three bedroom.
4. Cash flow is king
It’s less about whether or not this is a good time to invest in property and more about whether an individual property is a good investment. If you’re looking for income generating property, you need to decide what type of property you’ll be purchasing (single family vs. small apartment complex, for instance). You’ll then want to weigh factors like the property’s location and the relative value to the purchase price and the state of the local market. These factors feed into the rent (or rents) you can expect to collect from your property investments.
Of course, figuring out a prospective property’s projected cash flow is not simply finding the difference between your mortgage or lender payment and the project rent. A place to start is the 2% rule, which states that if you can rent the property for 2% of the purchase price, you should be able to make money on the deal. But, it’s best to run all the numbers, from property taxes to expected maintenance to know exactly how much you’ll make each month off the property.
If you’re looking to fix and flip, consider starting with the 70% rule. More of a guide than a hard and fast rule, it says that a flipper should not pay more than 70% of the After Repair Value (ARV) of a property. The ARV is what the house can be sold for after completing all work and renovations. Part of that, of course, is estimating renovation costs accurately. You’ll also want to be sure you can hit all of your renovation deadlines so you can offload the property as soon as possible and get your full expected return on investment.
Mapping your exit strategy
No matter why you’re investing, you’ll also want to sketch out your exit strategy from the deal. Do you want to sell in one month, one year, or five? Or, are you holding for the long-term? What if you had to sell later than expected, or earlier? When you have a sense of what each of these scenarios look like, you’ll be able to decide if now is the right time to start property investing — and if you’ve identified the property that’s aligned with your goals.