While both real estate investors and agents are facing new challenges as a result of the effects of the COVID-19 pandemic, this doesn’t mean buying your first investment property is impossible. Real estate activity is considered an essential business during these trying times. So even though activity had slowed down, people are still buying and selling homes. Also, the government has amended lockdown legislation on May 13th so that – provided social distancing rules are followed – agents can open, viewings can be carried out, and moving home is allowed. This means that activity in the US housing market is bound to get back up and investors should make their move while they can.
Why Is Real Estate a Good Investment Now?
Before we get into our tips and guide to buying your first investment property under the current circumstances, let’s have a look at why now is a good time to invest in real estate. First off, as few buyers are in the market, home values and prices are going down. Although experts don’t forecast a housing market crash in 2020, they do expect home prices to keep declining for at least a few more months. For real estate investors, this means you can get a good deal at an affordable price even in traditionally overpriced markets like New York, Los Angeles, and Chicago.
Moreover, the cause of the current crisis is not directly related to real estate. So, experts forecast the US housing market 2021 to bounce back relatively quickly. Experts believe that home prices and values will be back to their pre-pandemic levels within a few months after the end of the coronavirus. As a result of this predicted real estate boom, buying rental property now means you’ll make money later on from both the potential rental income and price appreciation.
Thirdly, because there are fewer homebuyers on the market, distressed sellers are desperate and motivated to sell to anybody. Accordingly, you can easily be buying your first property investment from these motivated sellers below market value. This is one of the best ways to optimize the rate of return on rental property. And finally, fewer homebuyers amid the current uncertainties also means many people will keep renting. Thus, the demand for long-term rental properties is expected to stay stable and even go up in the coming years. All of this explains why now is a good time for buying rental property and starting your real estate career.
How to Buy Rental property During COVID-19
Now you know the reasons for and benefits of investing in rental properties in 2020 and beyond. However, if you want to guarantee success, follow our tips and rules for buying your first investment property:
Tip #1: Define Your Investment Goals
Before anything else, a smart investor will have a real estate business plan that includes defined goals. For example, determine if you want to buy a single-family home or a multi-family property. Generally, multi-family properties generate more cash flow, but single-family homes have more equity appreciation potential. Or perhaps you’re more interested in condo investments due to their low-maintenance nature. In any case, you should understand the different types of rental properties and decide which type meets what you’re looking for and helps you achieve your goals.
It’s also smart to narrow down a price point. As we’ll discuss in-depth later on, you should expect to need a minimum of 20% down payment for an investment property loan (25% down payments are also common among real estate investors). If you want to finance your investment property, then it’s wise to use this figure to set your budget. Other things to consider when buying a house or rental property and to include in your budget are closing costs and interest rates. If you want to make repairs before renting out the house, that’s another cost to add in your budget.
Speaking of making repairs, that’s another thing to determine before buying your first investment property. Ask yourself: how much effort am I willing to put in? Investors typically find the best value properties that need some repairs, but this creates additional work. Alternatively, you can focus on finding a rental property investment that is rent-ready. There’s no right or wrong answer here, but considering these issues helps you a lot when the time comes to search for an investment property for sale.
Tip #2: Buy in a Market with Affordable Prices
As mentioned, the first reason for investing in real estate in 2020 despite the COVID-19 pandemic is declining home prices. This, however, doesn’t mean that properties have become affordable everywhere across the US real estate market. Going back to basics, location is key for profitable real estate investing. Some markets are experiencing significant drops in home prices, but others are barely seeing any change. So, instead of focusing your investment property search in a specific market, you should be more flexible in this area to take advantage of the current situation. The next on this checklist to buying your first investment property is to find areas that are experiencing the highest drops in home values.
These locations are some of the best places to buy rental property and there are some important benefits to buying cheap rental properties. First off, this lowers both your initial investment costs (down payment and closing fees) and recurring expenses (monthly mortgage payments, property tax, home insurance, etc.). In turn, this automatically enhances your return on investment. Besides, investing in affordable house rentals lowers the risk of defaulting on your mortgage payments and ending up in foreclosure. Most importantly, housing markets that took the largest plunges in home prices will experience the highest appreciation rates when the pandemic subside and things go back to normal.
To give you an idea of where to invest in real estate in 2020, Mashvisor did the research and found the Best Places to Buy Rental Property During COVID-19.
Tip #3: Consider Investing in Smaller Markets
One mistake that beginner investors make is that they’ll only consider buying rental property in major cities. We say this is a mistake for a few reasons. First off, major cities like New York, Seattle, and San Francisco are known to be expensive. While rental properties in these cities have high rental income potential, they’re not affordable which contradicts our previous tip. Moreover, expensive properties also have higher costs and expenses, which means you may not be able to get a good ROI. Another reason why you may want to avoid buying your first investment property in major cities is how badly these locations have been affected by the COVID-19 pandemic.
Alternatively, one important lesson the coronavirus is teaching us about real estate is that small, isolated locations might be optimal for investing. Research shows that housing markets in smaller towns have been less impacted by the pandemic. These areas are generally less connected to the global economy, meaning they’re better protected against different types of crises. Also, demand for rural homes has gone up as people began to fled big cities dealing with high numbers of coronavirus cases. This increase in renal demand allows landlords to charge high rents for their house rentals. Affordable prices and costs combined with good rental income is a recipe for positive cash flow in real estate!
Start looking for and analyzing the best rental properties in your market of choice using Mashvisor today!
Tip #4: Secure a Mortgage with Low Rates
If you have enough capital to buy an investment property with cash, you can skip this tip. But if you’re financing a rental property investment, you need to figure out where the money will come from. Financing an investment property can be different from financing a primary home. Lenders typically consider investment loans to be higher risk compared to owner-occupied homes loans. As a result, investors need to meet certain qualifications to get pre-approved. There are different options when it comes to investment property financing. Whichever type you choose depends on personal factors, but the 30-year fixed-rate mortgage is what investors opt for. To qualify for this mortgage type, you need:
- A credit score of at least 680 (an ideal score is 740 or higher)
- A 2-year job history at a US company. Self-employed individuals need to prove they had a monthly income and were financially stable for the past 3 – 5 years
- Have the cash needed for the down payment (at least 20% of the purchase price)
- Have cash available that can cover at least 6 months of expenses
- Maintain a consistently low debt-to-income ratio
Also, one of the important rules for buying your first investment property is to be pre-approved for a mortgage before you start looking for a rental property for sale. This will give you a better idea of how much you can spend on a property and not waste time analyzing properties that you can’t afford. Rental property mortgage rates are now at an all-time low, so if you qualify, you can easily obtain a loan with a low mortgage rate. This is another reason to invest in rentals in 2020 and something to take advantage of while you can.
Tip #5: Work with a Real Estate Agent
Investing in rental property for beginners can be overwhelming. This is why working with an agent is always a good idea, and especially during the coronavirus pandemic. Real estate agents are professionals with lots of connections and access to plenty of resources that beginners might not know. Therefore, they can help you find exactly what you’re looking for in less time and answer any questions you may have about the steps to buying your first investment property. And don’t worry, you won’t pay a fee to a buyer’s agent. In real estate transactions, the seller’s agent is the one who gets the commission. If you, as a buyer, come with your own real estate agent, the seller’s agent will split his/her commission with your agent after closing the deal.
Tip #6: Find Investment Properties Online
There numerous ways for a real estate investor to find rental properties, some traditional while others are more advanced. One of the best traditional ways of finding rental properties for sale is driving for dollars. For obvious reasons, however, it’s not advisable to move around excessively looking for “For Sale” signs. While you can try other traditional methods like asking your network or starting a direct mail campaign, these are not the most efficient and wouldn’t guarantee to find good real estate deals. The safest and best option now to find a real estate investment is online.
Of course, we’re talking about real estate investor websites that allow you to find investment opportunities. There are plenty of these websites out there, but investors will find that Mashvisor is among the best to rely on. Why? Simply because our platform comes with more than just property listings. We offer a Property Finder tool that allows you to search for and find the best rental properties that meet your specific criteria. Moreover, you’ll find property data for all listings on our website or a listing that you manually enter. This includes homeowner data and ROI data needed to decide if a property is a good investment opportunity or not.
Tip #7: Look for Distressed Home Sellers
As mentioned earlier, one benefit of buying your first investment property during COVID-19 is the fact that there are motivated sellers in the market. Despite slowing real estate activity, there are still plenty of distressed property owners who can’t afford to keep their homes on the market for long and need to sell immediately. However, those sellers now have a limited pool of potential buyers as most people are hesitant about making a major purchase amid uncertainty. Indeed, the number of distressed sellers have gone up due to the pandemic. These are considered motivated sellers because they’re desperate to sell and their houses. If a real estate investor shows interest in their property, they’ll be relieved and might even accept offers lower than asking price. In return, you can score a good deal below market value.
Tip #8: Analyze Potential Real Estate Deals
A common rookie mistake when buying rental property for the first time is to look at properties through a homeowner’s eyes. Beginners might miss out on a potentially good real estate investment just because they didn’t like the kitchen. Don’t make this mistake. Always invest in a property that is rentable, not one that meets your taste. Remember, you’re a real estate investor and your top priority should be to find investment properties that make money. So, our last and most important tip for buying your first investment property is to analyze the property based on real estate data before making an offer.
Conducting a rental property analysis involves running the numbers behind the deal to see how profitable it really is. The most important numbers to calculate are the rental income, expenses, cash flow, cash on cash return, cap rate (if you’re paying in cash), and occupancy rates. All of these will ultimately determine your overall rate of return on investment. If you don’t know how to calculate these numbers, you can check out the Mashvisor blog and find articles that break down all you need to know. Better yet, Mashvisor provides a readily available rental property analysis! You can get this analysis when you access the Rental Property Calculator after you click on any listing on the website. There, you’ll find all metrics readily calculated to estimate your potential ROI.
To learn more about Mashvisor’s tools and how we will help you make faster and smarter real estate investment decisions, click here.
The Bottom Line
It might be surprising, but the COVID-19 pandemic created some good opportunities to make money for real estate investors. So if you find a home that seems right for investing in real estate, you have job stability and you can get financing at historically low rates, buying a rental property might be a wise choice even under current circumstances. Now that you understand what to look for when buying your first investment property, make sure to follow the 8 tips above to enjoy a profitable real estate career in 2020 and beyond. To start searching for investment properties with a high return in the US real estate market, sign up for Mashvisor today with a 15% discount with promo code BLOG15.