In a market as hot as the one we’re experiencing, does it make sense to buy a rental property? The simple answer is, yes, as long as the numbers make sense for you. Just like purchasing a rental property in any other market, it all comes down to the potential profitability of the property and your potential ROI (return on investment). However, in this strong seller’s market, you should also consider factors such as higher purchase prices, recovery time assuming the market shifts unexpectedly, and demand for rentals in your specific area. So, let’s dive in and talk about purchasing a rental property in 2021.
Home value appreciation
Of course, if you’re going to purchase a rental property in any market you want to make sure the property is going to hold its value. The good news is, historical data proves that on average homes do appreciate over time even if values take a dip during buyer’s markets. The key is to hold on and ride out the shift during those markets.
As an example, in 2006, home prices peaked and took a dive as a result of the 2008 housing crisis. The bottom of that market was around 2010 and by the end of 2017 home values were back to where they left off in 2006. Granted, a typical market shift cycle is not so drawn out. Unfortunately for some homeowners and investors, the crisis of 2008 was a perfect storm of price correction and an extremely flawed banking system. Most market shift cycles typically last two to three years.
Some investors may also be taking advantage of the extremely low-interest rates in this market. If that was your plan you have an even bigger advantage to buying this year. With interest rates currently as low as three percent, you’re able to buy more homes and pay less over the life of the loan. Some investors may hold off until next year or the year after to expand their portfolios, waiting for prices to fall. But, if interest rates rise simultaneously, there is less advantage to waiting.
Where to look for rental properties
As a result of the COVID-19 pandemic, some things have changed in the world of rentals. For one thing, more renters are moving away from cities into suburban areas. When searching for your next rental property consider space and location to determine the best property to purchase. Check out single-family homes and duplexes in suburbs around major metropolitan areas. Also, consider the school district. Many parents may not have to go back into the office, but they will still want their kids to be in the best schools. If you’re planning to purchase your first rental property be sure you understand all the laws and regulations involved. Tenants in the post-COVID-19 era have more expanded rights you as the landlord will need to understand. But this isn’t the first time new regulations have been placed on business owners and it shouldn’t deter anyone from continuing to expand their rental portfolio. Just be sure you know the risks before you dive in.