From a borrowing perspective, 2021 is a great time to add an investment property to your portfolio. Not only are mortgage rates still sitting near record lows, but experts agree rates will stay competitive for the duration of 2021. Fannie Mae (OTCMKTS: FNMA) projects an average 2.8% rate for 2021, while Freddie Mac (OTCMKTS: FMCC) predicts an even 3% rate. And even if rates climb slightly, they'll still be attractive, historically speaking.
At the same time, at some point in 2021, mortgage forbearance is likely to come to an end. Once that happens, we may see a flood of homeowners who walk away from their properties and go on to rent instead.
All this makes the case to buy a home this year for your real estate portfolio. There's just one problem: Housing inventory is at such a drastic low that making an offer in any reasonably attractive market almost guarantees a bidding war.
As of late January 2020, there were an estimated 1.04 million homes available for sale, according to the National Association of Realtors. That represents a mere 1.9-month supply of listings -- well below the four- to five-month threshold needed for a more equalized housing market. To give yourself an edge in today's market, here are a few key strategies to employ.
1. Go well above the asking price from the start
Bidding wars are problematic because they drive property prices up. A good way to combat that is to make a seller an offer that's hard to refuse. Rather than go a few thousand dollars above asking, go bigger -- say, $10,000 to $15,000 above asking for a moderately priced home, or $20,000 or more above asking for a high-end home. While that may seem like shooting yourself in the foot, if you make an offer that's high but also within your budget, that may do the trick of eliminating other offers for a seller to entertain, thereby landing you a deal.
2. Pay cash
Maybe you recently sold a home you flipped, or you're sitting on cash from another successful investment. If you can afford to pay for an income property outright, do it. Paying cash for a property is a good way to get a seller to bite, and that way, you may be able to avoid having to go over a home's asking price.
3. Give your seller leeway with a closing date
Demand for rental homes isn't likely to wane anytime soon. If anything, rental demand could increase in the course of the coming year as unemployment numbers drop and more people find themselves in a comfortable enough position to sign a lease. For this reason, you shouldn't rush a seller to close. If you let them know from the start you're willing to be flexible with a closing date, that could spell the difference between having an offer on an income property accepted or going back to the drawing board.
The Millionacres bottom line
Adding an income property to your portfolio is a smart move these days -- especially if you target the right rental markets. For now, that generally means smaller cities and the suburbs of major cities, both of which have seen a surge in move-ins in the wake of the pandemic.
In fact, there's a good chance renters will continue to stay out of large, expensive cities until the pandemic is well behind us, so now's your chance to scoop up an income property you can finance affordably and rent out with relative ease. And if you employ the above tips, you may have a much easier time getting a seller to choose you as a buyer.