Is It a Good Time to Buy My First Rental Property?

COVID-19 has had an adverse effect on the world economy. Companies have shut down, millions of jobs have been lost, and savings wiped out. With the second wave of coronavirus raging in several US states, this doesn’t seem to be the right time to invest in anything. For many, the logical thing to do would be to hold tight to whatever money they have until things calm down.

However, while many people see a threat, others see an opportunity, specifically in the US real estate market. In fact, real estate has been one of the only sectors that have managed to thrive during the coronavirus pandemic. Unlike the stock market which has been unpredictable and volatile during this health crisis, the real estate market saw a slowdown during the first wave of COVID-19 but has generally recovered on the national level since.

With most reports pointing to a booming market, you may be wondering if now is the time to buy your first rental property. The truth is that there are pros and cons to investing in real estate right now. And to answer the question “Is now a good time to invest in real estate?” we need to take a dive deep into these factors. Here are a few things to consider before buying your first rental property in the current housing market:

Why It’s a Good Time to Buy Your First Rental Property

Low mortgage rates

Mortgage rates dropped to historic lows in 2020. Freddie Mac recently announced that the 30-year fixed-rate average dropped to 2.67%, while the 15-year fixed-rate average went down to 2.17%. These low mortgage rates have made owning an investment property more affordable for many real estate investors. You can buy your first rental property and start generating cash flow in no time.

Real estate appreciation

Low mortgage rates have definitely made real estate more affordable for investors and homebuyers alike. At the same time, they have driven competition in most housing markets across the US. There is a positive side to competition and bidding wars and that’s real estate appreciation. As demand continues to grow for homes, property values will continue to climb. Zillow forecasts that home values will appreciate by 10.3% from now through November 2021. This means that if you buy your first rental property today, its value is likely to increase over the next year.

High demand for traditional and Airbnb rental properties

Another advantage of increasing home prices? Demand for long term rental properties goes up as more buyers are priced out of the market. So if you buy your first investment property right now, you are likely to find a large tenant pool waiting to rent it. This means you should be able to enjoy low vacancy rates and good cash flow soon after the purchase.

Speaking of demand, Airbnb rental property will especially be in high demand in 2021 once the vaccine has been administered and people begin traveling again. So now is a good time to buy a vacation home as you’re likely to enjoy high occupancy rates in the post-COVID-19 world.

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**Why It May Not Be a Good Time to Buy Your First Rental Property**

Low housing inventory

COVID-19 has had a significant impact on the supply and demand for housing in the US. With the social distancing rules and stay-at-home orders, some sellers are still following the wait-and-see approach. There has also been a drop in construction and real estate development. Coupled with the rise in demand, inventory continues to drop across the US housing market. This makes it more difficult for a first-time buyer to find great real estate deals.

And, as mentioned, home prices continue to rise. Although lower mortgage rates will soften the blow, you might have to pay more for your first rental property than you would have paid one year ago.

Tighter mortgage requirements

tighter lending for buying first rental property

If you need a loan to buy your first rental property, you may face tighter lending requirements today.

Job loss reached unprecedented levels in 2020, with thousands of jobless claims being filed in the last few weeks. This state of affairs has left mortgage lenders worried that the high unemployment levels will lead to late payments and mortgage defaults in the future. Due to this economic uncertainty, mortgage lenders are now triple-checking employment status, requiring higher monthly payments, raising minimum credit scores, and even getting rid of certain loan types. These strict requirements will make it more difficult for real estate investors to qualify for a mortgage. Cash buyers definitely have the upper hand right now.

If you plan to take up a loan for a rental property, be sure to do the math first on a rental property or Airbnb calculator to see if the numbers add up to your liking.

The good news is that these tighter mortgage requirements minimize the possibility of a market crash. The US housing market crash of 2008 happened due to easy access to subprime loans, which borrowers were eventually unable to pay. If you are able to buy your first rental property in 2021, you won’t have to worry about a repeat of the 2008 crash.

Eviction moratoriums

A recent Census Bureau’s Household Pulse Survey revealed that up to 12.4 million renters were behind on rent. To protect Americans from eviction, the Centers for Disease Control and Prevention (CDC) issued an order stopping eviction of tenants to prevent further spread of COVID-19. Though this eviction moratorium was set to expire on the 31^st of December, congress is contemplating extending it further into 2021.

While the moratorium is good news for renters, it is a nightmare for property owners. With little or no cash flow, many landlords have struggled to make mortgage payments and cover rental expenses. Therefore, buying your first rental property in the current housing market could be very tricky if the eviction bans continue.

Ready to Invest? These Are the Best Places to Buy Your First Rental Property

There are definitely pros and cons to investing in real estate right now. However, for someone who is in a good financial position, there are some clear and unique advantages of entering today’s market. Just be sure to get your hands on a rental property in the right market.

Based on Mashvisor’s real estate data, here are some of the best markets to buy your first rental property. These are locations where landlords are currently enjoying a good return on investment, despite COVID-19.

#1. Muncie, IN

Median Property Price: $185,207
Price per Square Foot: $85
Price to Rent Ratio: 14
Monthly Traditional Rental Income: $1,109
Traditional Cap Rate: 5.4%

#2. Saint Cloud, MN

Median Property Price: $207,238
Price per Square Foot: $120
Price to Rent Ratio: 13
Monthly Traditional Rental Income: $1,330
Traditional Cap Rate: 5.3%

#3. Mesquite, TX

Median Property Price: $217,842
Price per Square Foot: $134
Price to Rent Ratio: 13
Monthly Traditional Rental Income: $1,438
Traditional Cap Rate: 5.1%

#4. Independence, MO

Median Property Price: $176,849
Price per Square Foot: $105
Price to Rent Ratio: 14
Monthly Traditional Rental Income: $1,060
Traditional Cap Rate: 4.8%

#5. Livonia, MI

Median Property Price: $260,551
Price per Square Foot: $166
Price to Rent Ratio: 13
Monthly Traditional Rental Income: $1,673
Traditional Cap Rate: 4.8%

For investors who plan to use their first rental property as an Airbnb, these are the best places (just be sure to check Airbnb regulations before making a purchase!):

#1. San Angelo, TX

Median Property Price: $348,191
Price per Square Foot: $150
Average Airbnb Daily Rate: $127
Monthly Airbnb Rental Income: $3,476
Airbnb Cap Rate: 8.3%
Airbnb Occupancy Rate: 71%

#2. Covington, GA

Median Property Price: $250,605
Average Airbnb Daily Rate: $158
Monthly Airbnb Rental Income: $3,184
Airbnb Cap Rate: 7.2%
Airbnb Occupancy Rate: 63%

#3. Greenville, NC

Median Property Price: $263,633
Price per Square Foot: $115
Average Airbnb Daily Rate: $92
Monthly Airbnb Rental Income: $2,463
Airbnb Cap Rate: 7.0%
Airbnb Occupancy Rate: 70%

#4. Chesapeake, VA

Median Property Price: $315,194
Price per Square Foot: $161
Average Airbnb Daily Rate: $166
Monthly Airbnb Rental Income: $3,910
Airbnb Cap Rate: 6.9%
Airbnb Occupancy Rate: 67%

#5. Eau Claire, WI

Median Property Price: $267,207
Price per Square Foot: $137
Average Airbnb Daily Rate: $120
Monthly Airbnb Rental Income: $2,612
Airbnb Cap Rate: 6.4%
Airbnb Occupancy Rate: 67%

Conclusion

Buying your first rental property is a major decision. With all the uncertainty caused by the coronavirus pandemic, choosing whether or not to invest in rental property is a very difficult choice. Consider all the factors before making your move.

To make your work easier, use Mashvisor’s real estate investment tools to find your first rental property. Whether it’s a buyer’s market or a seller’s market, great deals are always available on Mashvisor. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.

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