When it comes to investing in real estate, timing is key. Ideally, real estate investors should buy when the prices are low, and reap benefits when housing prices go up again.
A good time when prices were low was back in 2008, after the recession hit. However, it was also a time of economic crisis, and foreclosures were at a near-decade high. But, if you had bought a house back then in a lucrative commercial area, the price of that property would have doubled by now.
It’s not always easy to say when exactly it would be the best time to put your money in the real estate business. Sometimes when prices are high, the sector is in a bubble, as it was in 2007.
Investing in Real Estate
You shouldn’t invest in real estate just because a deal superficially looks amazing. There are several other factors to consider, namely the potential for growth and return. Higher cap rates can indicate higher risk. The risk could involve local instability like dangerous neighborhoods, or it could have something to do with the overall market in general.
There are three types of markets that matter for real estate: growth, stable, and declining markets.
- Growth markets occur in places that are experiencing an influx of population, rising income, and other factors, and make a place appealing to live in.
- Stable markets are places that aren’t growing so fast, but are unlikely to experience decline anytime soon.
- Declining markets as the name suggests, are going downhill with people moving out of the area. When investing in real estate, you should look for either growth or stable markets.
With the above in mind, let’s look at five factors that say the time is right to investing in real estate in an area:
1. Home Prices are Rising
Rising home prices indicate a growing market. Right now in the U.S., house prices are rising overall. Compared to 2015, the national home prices in 2016 rose by an impressive 5.7 percent, according to a CoreLogic study.
Some states—namely Oregon, Washington, and Colorado—saw rather amazing house price hikes by as much as 9 percent yearly. Since 2009, the median prices of homes in the U.S. have risen significantly. The numbers for 2017 are not available yet, but it is highly unlikely that the streak will be broken anytime soon.
Aspiring real estate developers should buy right now to enjoy high rentals and resale values in the future. But it’s also noteworthy to keep in mind that national rates may not always indicate local data for select markets.
When you buy, you should always check the median housing prices for the local market. For example, while housing prices for Denver have been rising astonishingly, the same is not true for Chicago. So, always do check local data without solely depending on national data.
2. Millennials are Starting to Buy Houses
The time when everyone was hotly anticipating millennials to start buying houses has finally arrived. Millennials are reaching their late twenties and early thirties.
In 2016, a whopping 61 percent of all home buyers were under 35. In the coming five years, it’s expected that more and more millennials will be looking to buy houses as they get married and settle down. It’s the 21st century baby boomer market.
Wages have also been rising for most professions, so it’s unlikely that highly-educated millennials would put off buying. Even if millennials shun buying, they will definitely rent, which is also another great sign for real estate investors.
3. The Rental Market is Growing
Renting is at an all-time high. In urban areas, people, especially young people, are more likely to rent than buy. There are now fewer distress properties thanks to the real estate market having bounced back. And that has raised the price of rentals.
If you are a buy and hold real estate investor, now is the best time to prepare a property for rent. It should be noted that single-family rental marketing is remarkably growing, according to Dennis Cisterna, the CRO of Investability.
As mortgage rates are rising, the lower income bracket is increasingly renting, and the trend will very likely continue into 2017 and beyond.
4. Inventory Remains Low
In many cities and areas in the U.S., there are more home buyers than sellers. The inventory levels are tight, which makes the current real estate market a seller’s market.
Many realtors across hot markets like Denver are saying each home for sale gets multiple offers. It’s not unlikely to sell above the listed price considering the tight inventory.
Also, the recession shut down the market for low-priced entry-level homes. New homes are still being built. This is a great opportunity for savvy real estate investors to take advantage.
5. Interest Rates are Still Quite Low
Earlier this year, the Fed raised the interest rate by 1 percent to stall the possibility of inflation. However, mortgage interest rates remain below 5 percent.
In fact, consumers can receive a 20-year fixed conforming loan for under 4 percent! The maximum rate right now is for a 30-year fixed FHA mortgage for 4.7 percent. In addition, foreclosure levels are also at a low since the year 2000.
All this is great news for homebuyers as well as people who invest in real estate. Low rates make it easy for people to purchase homes without the risk of foreclosure in the future. As many young people are already moving to buy new homes, the low rates only mean that there will be great demand in the market in the coming two years.
This year, home sales in the U.S. have been rising. January and February are traditionally slow months for real estate, but there are more people buying now to avoid higher interest rates in the future. Because of the interest rate hike, home buying will be slower than in the previous two years.
Yet, the market is embodying great potential to grow in the coming years. Millennials will definitely be driving the sales and rentals. As millennials age and become earners of a higher income bracket, the demand for real estate will grow. Foreign purchases have also seen a spike in areas like Texas where rich Chinese are driving the demand.
All in all, it has never been better since the recession to investing in real estate.