What is the most important factor when it comes to investing in real estate? For many people, the answer is location, location, location! However, the truth is that timing is equally important. Choosing a good time to invest in real estate will have a major effect on the long-term profitability of your investment. If you buy a house in a great area without considering housing market trends and real estate cycles, your investment could turn out to be a disaster.
So, when is the best time to invest in real estate? The following are some signs that show its time to jump in:
1. You are financially stable
With a current median list price of $349k, purchasing an investment property in the US housing market 2020 can be very prohibitive. In most cases, you will be required to pay a down payment of between 3% and 20% upfront. For a home valued at $250,000, the down payment will be $7,500 – $50,000, for example. You will also be charged closing costs ranging from 2% to 5% of the property’s purchase price. Besides these upfront costs, there will also be recurring costs such as mortgage payments, property taxes, maintenance, homeowners insurance, utilities, and HOA fees.
Being financially stable means having enough money to cover all these costs without struggling to cover your general living expenses. It also means having a good credit score which allows you to access good mortgage rates. In fact, if you have enough money, buying an investment property with cash right now and avoiding debt would be a great idea.
2. You have enough equity in your first home
Investing in real estate doesn’t always require you to have the money to make a down payment. If you already own income property, you can tap into the equity to secure investment property financing. Let’s say you bought your first home at $500,000. If you have already paid off $350,000, the property has equity of $350,000. You can leverage the home’s equity to secure a home equity loan or a home equity line of credit for buying a second home.
3. You have done your research
Due diligence is a very important aspect of deciding when to invest in real estate. This basically means doing your homework before signing on the dotted line. Whether you are thinking of purchasing a multi-family home, condo, townhouse, or apartment, there are several things you need to do to minimize risk and maximize your return on investment:
- Real estate market analysis – The first thing you need to do is analyze the real estate market where you want to invest. Mashvisor’s real estate heatmap analysis tool will show you the most lucrative areas of a city. You can analyze different neighborhoods using metrics such as rental income, listing price, cash on cash return, and Airbnb occupancy rate. Other factors to consider during neighborhood analysis are population growth, economic growth, crime rate, local laws, and proximity to amenities.
- Rental property analysis – After finding a favorable area, it is time to analyze listed or even off market properties. Mashvisor’s investment property calculator will generate numbers such as cash flow, cap rate, cash on cash return, and occupancy rate for you to quickly evaluate any deal in the market.
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- Home inspection – This will help you identify potential defects in the investment property you want to purchase. A general home inspection will check the condition of the roof, heating and cooling, electrical, plumbing, water heater, and kitchen appliances. You might also want to conduct specialized inspections for defective drywall, radon gas, lead-based paint, and water or insect damage.
4. It is a buyer’s market
Every real estate market fluctuates based on the forces of supply and demand. Before deciding when to invest in real estate, find out if the neighborhood is experiencing a seller’s market or a buyer’s market.
A seller’s market happens when demand exceeds supply. This means that buyer interest in the market is high, but there are few homes available for sale. The shortage of property results in intense bidding, which eventually drives up the price of houses.
On the other hand, a buyer’s market happens when supply exceeds demand. There are many properties for sale, but few interested buyers. In such a market, homes stay on the market longer than usual. As a result, sellers are more willing to lower their prices in order to attract buyers. A buyer’s market is therefore a good time to invest in real estate.
5. It is the right time of the year
Arguably, winter is the best time to look for real estate deals. Since most people are busy with Christmas festivities, there are very few buyers competing for the properties available. In addition, families with young children find it very difficult to move in winter. The low demand will give you an advantage on the negotiation table and allow you to get more concessions from the seller. You will also have several homes for sale to choose from. In addition, buying in winter gives you the opportunity to detect snow-related problems during the home inspection.
The second best time when to invest in real estate is spring. There will be an increase in properties for sale and sellers who are eager to take advantage of the increased demand. If you are prepared with cash or a mortgage pre-approval letter, you will stand out from other buyers and get a good deal.
‘When should I invest in real estate?’
The decision of when to invest in real estate should be determined by a combination of two or more factors listed above. For instance, even if you have all the finances in place, you should still mind your due diligence before buying an investment property. And remember, never worry too much about trying to time the market – if you find a good real estate deal, have done your market research, and have the cash, then don’t wait for a buyer’s market or the winter to roll around!