At the beginning of the pandemic, it seemed like every other headline focused on property purchases by real estate speculators. Almost any property became a popular commodity due to low rates, growing rents, and an abundance of inventory. Today's environment is different, with limited inventory, persistently high prices, and rising borrowing rates. So, is this a good moment to purchase your first investment property, or another one? Let's examine how the market now stands for investors of all stripes.
The evolution of real estate investing since 2020
The era of extremely low real estate prices is long gone. The sub-3% mortgage rates of 2021 are probably not going to happen anytime soon, but they are still significantly lower than their peak of 16.63% in 1981.
Furthermore, albeit not as quickly as they did in 2021, property values are still rising. In many markets, this combination of increased rates and prices has reduced the number of purchasers and made it more difficult for investors to find deals. The need for rental properties is also increasing at the same time.
However, it might not be a good idea to wait for either of those things to happen before investing in real estate under more favorable conditions.
In an email interview, Tim Lawlor, CFO of the real estate investing lender Kiavi, stated, "We don't anticipate housing prices or rates to drastically decline anytime soon." "There probably won't be much of a benefit to waiting for those looking to invest in rental properties."
In other words, rather than greater patience, today's market demands sharper pencils. Let's examine that concept in greater depth.
The argument for making an investment right away
According to Lawlor, a deal must "pencil out"—that is, it must make financial sense right away on paper—in order to make sense in the current market.
"When conducting their deal analysis, investors should take into account all of the expenses related to rental property," Lawlor advised. "This includes an analysis of local market rent prices, as well as the costs of borrowing, insurance, repair and maintenance, and marketing."
It might be a smart investment if, after accounting for all of those variables, the property can still provide positive cash flow. But remember to account for the sporadic vacancy. Today's top residential real estate investments are those that pay off right away and continue to turn a profit even if you go a few months without a tenant.
Here's a basic illustration: Let's say the monthly rent for a property is $2,500. You have a $1,800 mortgage plus $400 a month for taxes, insurance, and repairs. On paper, that results in a monthly positive cash flow of $300. On the other hand, a more practical approach budgets for vacancy, i.e., one month each year without a tenant (-$2,500). The monthly rental income is reduced by about $210 when the vacancy cost is divided by the number of months. Your actual monthly cash flow now approaches $90.
Even a conservative positive number could prove to be a worthwhile investment in today's higher cost market, especially if rents are still rising and you want to refinance your mortgage in order to obtain a lower rate in the future. That narrow margin may not sound all that enticing.
Potential hazards in the current (and any) real estate market
Although spreadsheet figures may appear appealing, David Schneider, president of Schneider Wealth Strategies, highlighted the importance of people in the investment real estate industry.
In an email interview, Schneider stated that "a bad tenant is the biggest risk for landlords." Returns can be rapidly erased by property damage, late rent, and strict eviction regulations.
To put that into perspective, imagine that you are relying on the previously mentioned $2,500 in rent. In addition to possible repairs and legal fees, you would lose $7,500 in revenue if your tenant stops paying and it takes three months to get them out. A single unsatisfactory renter has the power to wipe out a year's worth of profits or more.
Beyond tenants, a planned-out contract might be abruptly flipped upside down by increased insurance costs or an unexpected $10,000 roof replacement. "Pass on a deal if it doesn't make sense at the current rates," Schneider said. Analyses that include a buffer can prevent surprises from turning into disasters.
Things new investors need to be aware of
Being prepared for everything once they leave the closing table is the most obstacle for novice real estate investors, not simply purchasing real estate. Many novices misunderstand the daily responsibilities of being a landlord, Schneider cautioned. Finding the correct property is only as important as screening potential tenants, planning for vacancies, and being aware of local rental laws.
Schneider suggested putting your figures through a stress test. A property may not be the best option for the first property in your portfolio if it only performs well under ideal circumstances. Additionally, he advised potential investors to be realistic about their "lifestyle fit," or the degree to which they wish to be involved with the property.
Does employing a property manager make more sense, or are you comfortable managing "tenants, toilets, and trash" on your own? Although outsourcing has a price tag, it might save you from burning out on property maintenance that you might find difficult to manage.
Considerations for recurring investors
In the current market, you have a different strategy in 2025 and 2026 if you want to add a new home to your portfolio. Lawlor stated that you should probably look for off-market deals through wholesalers or personal networks rather than depending on standard listings, pointing out that this change is mostly the result of limited availability.
Additionally, he pointed out that experienced real estate investors would want to look into areas like the Midwest, which have relatively modest purchase prices and consistent rental demand for high yields. Compared to chasing more competitive, expensive markets, that combination may yield more consistent profits.
Adding single-family rentals, modest multifamily structures, or even mixed-use properties to their portfolios is another way for repeat investors to diversify the kinds of residences they buy. Although the risk profile of each type of home varies, diversifying beyond a single category might offer stability in the event that markets change.
Finally, by refinancing their mortgage, obtaining a home equity loan, or employing tax-advantaged tactics like 1031 exchanges, investors who already have equity in other properties may also discover innovative methods to use it to invest in new ventures.
Investor pre-purchase advice
Regardless of your level of experience, knowing a few basics will help you make better choices in this difficult market when it comes to real estate investment in 2025.
Calculate the entire cost.
Consider closing expenses, taxes, insurance, maintenance, utilities, and vacancy allowances in addition to mortgage payments. Unexpected costs, like homeowners' association dues, can quickly turn a contract from lucrative to risky.
Think strategically about marketplaces.
For first-time investors, the math frequently doesn't work out nicely in more expensive coastal towns. Instead, think about searching the entire country for a market that is favorable and where you can balance market rents and the acquisition price.
Make a management plan.
Make a decision in advance as to whether you will manage your property yourself or hire a property management. If you decide to do it yourself, hire trustworthy contractors in advance.
Create a cash reserve.
In the event that a tenant abruptly vacates or a major issue arises, having three to six months' worth of bills saved up will help you stay afloat.
Consider the long term.
Schneider pointed out that patience and preparation are essential in real estate; it's rarely a quick triumph. Usually, the payoff happens after years of consistent loan repayment and rent growth.
Make use of tools
Online tools, such as After Repair Value (ARV) estimators and rent calculators, can improve your ability to assess offers. According to Lawlor, Kiavi provides a free ARV calculator to assist investors in rapidly calculating their figures prior to purchasing a home.
FAQs for purchasing real estate properties nowadays
Is it prudent to make a real estate investment at this time?
Depending on the contract, yes. Now can be a good time to invest if a property still makes money after paying for its expenses, such as the mortgage, property taxes, insurance, and repairs. Because prices and rates could not move significantly in the near future, experts advise against waiting for a market movement.
What is the ideal holding period for an investment property?
Depending on your circumstances, many investors hope to hold onto their investment property for at least five to seven years. The property must turn a profit and continue to appeal to potential new homeowners or investors in order to have the best holding time. This implies that the property should offer you a respectable return on your investment at the closing table, be in a condition that appeals to both investors and buyers, and turn a profit at current market prices.
For novice real estate investors, what is the greatest risk?
The biggest concern for novice real estate investors is tenant issues. A successful rental agreement can be swiftly ruined by a renter who fails to pay or causes damage to the property. First-time investors should steer clear of expensive pitfalls by carefully screening potential tenants, creating a realistic budget, and being aware of local lease laws.
