How To Choose Where To Invest In Real Estate

How To Choose Where To Invest In Real Estate

Investing is trending among millennials, and one of their favorite types of investment is real estate. In fact, a recent survey from Bankrate shows that 33% of millennials prefer to invest money in real estate, rather than in stocks or bonds.

If you are one of those investors, here are a few things that could help you make wise decisions when picking your investment locations.

Pay attention to property prices. Rising property prices are a good indicator of a hot real estate market. If an investor can catch the movement early enough, and make smart decisions about which properties to purchase, it presents opportunities for great returns on the investment. 

The state of Arkansas is a great place to witness this firsthand, according to an article from Roofstock. The median home price is just $159,714, which makes property affordable for first time investors. However, those prices are on the rise. Year over year homes have increased in value +15.3%.

Currently only 84% of homes in Arkansas are occupied, which means that about 1 in 6 are available for purchase. Distressed property investors are set to make big money there, as the average rental on a property is $914. If an investor can snap up distressed homes for a small investment, then turn them into rentals, that person develops a lifetime of residual income.

Two other factors to consider in the state are job growth and property taxes. Currently, property taxes average less than $800 annually, making it affordable to own property in Arkansas. Also, jobs increased by 3.25% last year, which means there are more families with income who are in need of housing.

If the plan is to rent investment properties out and not fix and flip them, choose cities where rent is affordable. Having property no one can afford to rent means owning something that is not profitable. Be sure to compare rental prices to local wages and invest in a market that is sustainable for the intended asking price.

Another factor to consider is population growth in the area. If people are moving away from a city, it leads to owning vacant properties that no one wants. This equates to taxes going out with no profit coming in. Look for locations people are moving to and invest money there. 

If the intention is developing rental properties, check the local market. Invest in cities with a high rental occupancy rate. This is a really good indicator that the local market is saturated with people who want to rent property. If there are a lot of unrented vacant homes in the area, investing in another location is most likely going to be a more effective investment solution.

The COVID 19 pandemic hit the housing market hard, as it did the rest of our economy. However, housing has bounced back rather quickly from it. In spite of supply chain shortages and record setting prices on materials, new homes went up in almost every city in the US last year.

The influx of new homes on the market will most likely not drive prices down in the near future. In fact, some experts believe that mortgage rates will continue to climb into 2023.

Robert Johnson, Professor of Finance at Creighton University's Heider College of Business, believes the Fed will increase interest rates again. He told Bankrate, “By the end of 2023, financial market participants expect that the Fed will have increased the target Fed funds rate by 175 to 200 basis points from current levels. That would translate into 30-year and 15-year mortgage rates at roughly 8.50 and 7.70 percent.”

Dennis Shea, the executive director of the J. Ronald Terwilliger Center for Housing Policy at the Bipartisan Policy Center, told The Hill:

“That’s a lot more money you have to pay out every month, between a 3 percent interest rate and a 7 percent interest rate. It’s a significant chunk of change you have to pay out, even when the housing prices go down.”

This means that waiting in hopes of getting lower interest rates on potential investment property mortgages is probably a bad decision. The higher the interest rate, the lower the profit.

So, how does an investor counteract what could be a negative impact on their investment? The simple answer is to protect that investment. The first way to do that is to research the target market and make sure it fits the intended investment plan.

Following the tips above can be a big help to making solid investment decisions. Choosing the right location to invest is the key to success. If investors drop big bucks into a town that has a market saturated with unoccupied properties, or that people are rapidly abandoning for other locations, it could mean a wasted investment.

However, even amidst the possibility of rising interest rates and lower property availability, investors can absolutely make a profit, if the money is invested correctly. Investors should watch for market locations where demand is high, and develop leads that bring the right properties to invest in.