5 Best places to invest in real estate in 2021

As the COVID-19 pandemic unfolded, leaving many in dire financial straits, the real estate market boomed, making homeowners and real estate investors the beneficiaries in strained economic conditions. In fact, homeowners with mortgages saw their equity increase by a collective $1 trillion in the United States between September 2019 and September 2021, according to CoreLogic.

The S&P CoreLogic Case-Shiller National Home Price NSA Index, which tracks price changes of single-family homes, showed that as of November 2020, housing prices had risen 9.5% from the previous year. At the end of 2020, the average home was worth $245,000. According to the National Association of Realtors, that number had increased to $295,300 by June of 2021.

The pandemic affected both the supply and demand for housing. Mortgage rates plummeted, decreasing the cost of borrowing money to buy a house, and increasing demand. An improved economy and a generation of millennials who entered their homebuying years and were able to work from home further increased that demand.

Through it all, the Federal Reserve has continued to support the housing market by buying $40 billion in mortgage-backed securities every month. The supply of available homes decreased as many buyers—who were now more mobile than ever—snapped up homes in less crowded, suburban areas. Meanwhile, people who would otherwise have listed their homes held onto them or took them off the market.

Renters have migrated to the suburbs looking for less densely populated multifamily communities. And so have businesses. Major employers expanded to states like Texas from higher-priced states like California (notably Tesla, Apple, and Samsung). Moves across the country have created some market booms for cities like Raleigh-Durham, Austin, Boise, and Phoenix, where there are good business climates, job growth, educated workforces, and affordability as people relocate from populated city centers like San Francisco, Los Angeles, and New York City.

All this has translated into some markets in which buying single-family housing, multi-unit housing, or single-family housing that’s suitable for roommates is a solid investment. As long as the inventory of homes for sale is low, the rental market demand will continue to increase, making investment properties attractive. According to the Census Bureau, in the third quarter of 2020, single-family rentals had an average 95.3% occupancy rating. But as always, real estate is a local investment, so if you’re jumping into the real estate investment market, you’ll need to thoroughly research the best places to invest now.

When you’re evaluating a real estate market for potential investment, you should develop a set of criteria for acquiring rental properties. Here are 5 things to consider. 

1. Job growth: As some cities have benefited from the moves of large corporations—and others have encouraged the moves with tax incentives and other breaks—the job prospects in some cities have grown. A recent study by WalletHub determined the best cities for jobs for 2021 by evaluating some key metrics, including employment growth and unemployment rates.

2. Population growth and rental occupancy rates: Naturally, strong population growth—particularly into areas where rental occupancy rates are already high—increases your likelihood of renting out faster and for better rates. You can find vacancy and occupancy rates on sites like Zillow Research. Remember, vacancy rates can vary from neighborhood to neighborhood, so drill as far as you can into the local area’s number.

3. Affordability and cost of living: Gauging a city’s affordability involves a number of metrics, including median home prices, median rent, state and local income tax rates, and the cost of living index, a metric that determines your local buying power relative to the national average in purchase price, rent, utilities, food, and transit.

4. Potential appreciation: As you consider a real estate investment in any market, you’ll want to estimate the property’s potential to generate rental income, which you can do by comparing the rental histories of similar nearby properties. It’s also useful to consider the potential future value of the real estate; for instance, if a property isn’t clearing a lot on rent but its value is appreciating, it might still be a good buy.

5. Potential income: You’ll want to estimate your potential income from a property purchase to assess whether it’s a good investment. You can make that calculation by taking the revenue minus expenses (income) and dividing that by the cap rate—or the annual rate of return an investment property is expected to generate. A good cap rate is generally considered to be 10%.

Remember that the best move is to think holistically about a market. Are there cultural or sports attractions, walkability, or lots of urban parks that would make a city even more desirable? What kinds of infrastructure investments are being made in the location, and what are the city or community plans? 

Every year the Urban Land Institute and global consulting and tax firm PwC look at the top housing markets for the coming year in their Emerging Trends in Real Estate report, which considers not only important factors like economic and financial issues but also sociopolitical issues, and real estate and development—as well as real estate industry disruptors.