Are you wondering how to invest in real estate in 2020? Each successful rental property investing decision begins with choosing the right US housing market. There are many factors which determine how good a real estate market is for investing. Here are the 8 most important indicators which every beginner real estate investor should take into consideration.
1. The Local Economy
The current state of the local economy as well as the expected economic growth in a location is the one of the most important factors to choose a US housing market for buying rental property. Strong economies which grow at a constant rate year after year translate into a stable, high real estate appreciation rate. This means that an investment property is expected to bring a good long term return on investment.
Moreover, current and future economic trends in a location affect the real estate trends in the market. Growing economies attract new migrants, so demand for traditional rental properties is always increasing. High demand is equivalent to low vacancy rates and high rental rates, which – from the point of view of real estate investors – leads to above-average rental income and good rate of return on a rental property.
Pro Hint: The Seattle housing market is home to one of the 25 strongest and fastest growing economies in the US right now, according to WalletHub.
2. The Labor Market
Another crucially important factor to consider when deciding where to invest in real estate in 2020 and beyond is the state of the job market. This, of course, is closely related to the overall economic performance of a location. A strong and growing labor market with many employment opportunities attracts new people to move in year after year. As many of these people are not sure for how long they will stay, they look for long term rentals in the local US housing market. The more new tenants in a market, the higher rental income real estate investors and landlords can expect.
Additionally, it is important to look for a real estate market which not only creates numerous work opportunities, but where jobs are reliable and well-paid. Tenants with a reliable source of income will pay rent on time each month and cause no problems to a new real estate investor. When rent is not being delayed, landlords do not run the risk of missing mortgage payments, ending up in a foreclosure, or having to resort to an eviction. This is the ideal situation which every investor in traditional rentals should strive to achieve.
Pro Hint: The Denver housing market is one of the 5 hottest job markets in the US in 2020, according to The Wall Street Journal.
3. Demographics
When choosing the best US housing market for investing in real estate, you should also look at the population growth. Some places experience significantly higher demographic growth rate than others. The reasons could be many such as people having more children, job opportunities, education opportunities, excellent standard of living, and others. What’s important for real estate investors is that such places produce a higher demand for traditional rental properties.
In other words, an income property rented out on a long term basis will enjoy a maximum occupancy rate. This, alternatively, is one of the determinants of the return on investment of a rental property, whether we look at the cash on cash return or the cap rate.
Pro Tip: The Austin housing market is the fastest growing US city, according to the U.S. Census Bureau.
4. Annual Number of Visitors
If you are thinking of buying an investment property to turn into an Airbnb rental, then you should choose a US housing market with a large number of visitors. This could be either tourists or business travelers. To find such a market, you should look for locations with numerous tourist attractions and natural attractions (such as beaches or ski resorts) as well as business and commercial opportunities.
Related: Buying Airbnb Property? Then You Need These 3 Tools
However, as a new real estate investor, you should not necessarily go for the top tourist destinations which come to your mind, such as Las Vegas, Los Angeles, New York City, and Boston. First of all, housing prices there are usually unaffordable for someone who’s just starting in rental property investing. Second, most of these markets have made Airbnb investment properties illegal. Short term rentals in most major US cities are legal only when the owner is present and for a limited number of days per year.
Pro Tip: The California housing market attracts the highest number of domestic and international visitors in the US.
5. Median Property Prices
The next indicator to pay attention to when choosing a real estate market for buying rental properties is the median home price. There are many benefits to real estate investment in the cheapest housing markets in 2020. For instance, investing in the cheapest homes in America means affordable financing. A lower down payment and lower monthly mortgage payments minimize the risk of a foreclosure. In addition, if you decrease your startup and recurring expenses through reasonable real estate prices, your return on investment will go up.
Another major advantage of buying an income property in an affordable location is that such markets are less prone to a housing market crash in 2020 or later. A housing market bubble is less likely to occur – and burst – in a reasonably priced location where home prices correspond to actual real estate values.
Pro Tip: The Pittsburgh housing market heads the list of the most affordable locations for real estate investing in 2020, according to real estate data analysis by Mashvisor.
6. Mortgage Rates
To buy a profitable investment property, it is important not only what its price is but also what interest rate you will be expected to pay on it. Very few real estate investors – especially beginners – are able to buy a rental property in cash. That’s why the mortgage interest rate is yet another key factor when choosing a US housing market for rental property investing.
Indeed, interest rates on mortgage loans vary widely from one real estate market to another in the US. You should look for a location with a low mortgage rate as this will make your real estate investment business less risky. Furthermore, this will lower your recurring monthly costs, which will automatically push your cash on cash return up. Investing in positive cash flow properties is easier with affordable expenses.
Pro Hint: The Washington State housing market offers some of the lowest mortgage interest rates nationwide, according to LendingTree.
7. Rental Rates
The average return on investment in a US housing market is determined mostly by the median home price and the average rental rates. That’s why the traditional and Airbnb rates are the next factor to consider when selecting a real estate market for investing. Rental rates which are high compared to investment property prices and rental costs will optimize cash flow and produce the best rate of return.
To figure out what rental income they can expect in a certain location, real estate investors need to find rental comps, i.e., operational rental properties similar to the one they are planning to buy and located in the same neighborhood. Alternatively, they can use Mashvisor’s real estate investment software to get instant access to traditional and Airbnb rental comps in any US market.
Related: How to Use Mashvisor’s Real Estate Investment Software Platform during the Coronavirus Pandemic
Pro Tip: The Key West housing market provides some of the best Airbnb daily rates and rental income across the US real estate market.
8. Return on Investment
Naturally, the best places to invest in real estate in 2020 and after are those which are able to generate the highest return on investment. The two most popular metrics of profitability in rental property investing are the cash on cash return and the cap rate. For both measures, it is recommended that investors focus on a US housing market which can offer 8% or more.
Related: Cap Rate vs. Cash on Cash Return: How to Calculate Rate of Return in Real Estate Investing
Conducting real estate market analysis on dozens of US cities to choose the most profitable one within your budget requires months of hard work. That’s why investors should look for the best real estate investment tools which help them simplify neighborhood analysis and even investment property analysis. Mashvisor’s real estate investment app turns 3 months of research into 15 minutes. It allows investors to find the best neighborhoods for investing in traditional and Airbnb rental properties quickly and efficiently. Moreover, within each city or neighborhood, they can search for the top-performing income properties which meet their budget requirements and return on investment expectations.
Pro Hint: The Florida housing market is one of the top locations for buying both traditional and Airbnb rental properties in the US, according to traditional and Airbnb data from Mashvisor.
In conclusion, these are the 8 main factors to focus on when choosing a US housing market for rental property investing. To buy an investment property with a high return of return in one of the best locations for real estate investing, sign up for Mashvisor now.