As we find ourselves navigating the current situation at hand and trying our best to stop the spread of Covid-19, many people in the real estate realm are asking, is now the right time to buy an investment property? With economic uncertainty constantly lingering in the back of our minds, it can be hard to judge whether or not buying any type of real estate is a smart move right now.
As we feel the economy changing hour by hour, I trust that now is an appropriate time to share my six trusted characteristics that I use to determine if I am making a good investment or not. These six characteristics will help you slow down and face the facts head-on. Knowledge is power and by using this power we can make strong and well-informed decisions. Anytime we go through a financial crisis, one of the things you need to know is that there is always going to be opportunities to find value in real estate!
Six Characteristics to Determine When’s A Good Time to Invest in Real Estate
1. When prices are no more than two to three times the median income. Many real estate investors share a common knowledge of supply and demand. Otherwise known as the most basic law in economics. According to this law, if the housing prices are too high for the buyer to comfortably afford, then houses are not going to sell as well. In turn, this means that if the buyers can’t afford to purchase homes, prices are going to drop as a result. Once you’ve determined the area in which you are looking to buy, spend some time searching online for the median income and the median sales price of a home in that area. Take those numbers and divide the income into the sales price. This is a great way to quickly evaluate the value of any real estate property.
2. When the monthly rent returns are 1 to 1.5% of the purchase price. Determining the return on an investment property is just as important as establishing its value. It is not the cost of the house that is significant, but rather what the property will rent for. When looking at any property, always ask: How much will it rent for? You should aim to have a monthly gross return of 1 to 1.5% of the purchase price. If your total investment is $100,000, that means you want to receive a monthly gross rent of about $1,200. You want a positive cash flow of about $300 a month after your principal interest taxes. By using this simple formula, you can determine if an investment is a good deal or not.
3. When the housing supply is diminishing. Because of the transactional nature of real estate, the housing market relies heavily on supply and demand. That’s why prices rise when demand increases. If you’re trying to gauge whether or not it’s a buyer’s market or seller’s market, consider the inventory. In other words, how many homes are for sale. Use helpful online resources such as Zillow or Redfin to analyze the supply and demand in your area. You can even ask your realtor for further information. In order to calculate the housing supply, you want to divide the houses for sale by the houses sold in one month. If it turns out that the housing supply is under six months, I recommend that you do not buy and hold off. However, if the housing supply over six months, you have a good investment on your hands!
4. When job growth is taking place. An important factor to consider when investing in real estate is steady job growth. When we look at real estate demand, it’s clear that job growth is extremely critical for the overall health of a market. If the economy is on a good path, the demand for housing will be high. To view job data and statistics, The Bureau of Labor and Statistics offers job data from states and counties all over the U.S. You can use their website, bls.gov, to check the job growth in your area. You want to keep a close eye on the wages and the amount of employees in your sector. The changes and shifts in wage distributions and the number of employees will help you determine where the market is headed. Job data can ultimately help you decide which niche market will offer the highest return and lowest risk.
5. When property taxes are low. When you hear the word “taxes”, it may make you fidget in your seat. So it’s important you know that when it comes to investing in real estate, property taxes will play a big role in your expenses. The good part is if you own an investment property, you can deduct more expenses than you can as a homeowner. But keep in mind that for as long as you own the property, you will have to pay real estate taxes. A great way to discover property taxes in your area is by visiting Realtor.com. If you want to estimate your real estate taxes, simply multiply your home’s assessed value by the mill levy.
6. When prices are still flat or slightly increasing. When home sales and leasing are flat or on a slow upward rise, this is when properties will most likely be priced below value. This typically happens after a recession and is known as the “recovery period”. This is a stellar opportunity to find cheap properties that you can hang on to until the next real estate cycle. Identifying real estate cycles can be a bit tricky, so don’t be afraid to consult with experts! Timing means nothing if you don’t have the knowledge to carry you through!
A substantial part of investing in real estate is knowing when the right time to buy is. If you have a property you are considering, what do these six characteristics tell you about it’s buying potential? Do you consider now to be a good time to invest? As handfuls of questions regarding real estate come in during this time, I strongly believe that the Real Estate Workshop I’m hosting in June will be more influential than ever! And we still have a few tickets left! If you have real estate questions you want answered, join us on June 12-14th in Denver, Colorado for a weekend-long workshop. To learn more and purchase your ticket, click here.