Back in March of this year, the real estate market looked to be headed into a steep decline as COVID-19 began to spread. The pandemic has certainly affected every industry but somewhat surprisingly, real estate has weathered the tough economy remarkably well. Rather than seeing an epic decline in real estate values, 2020 achieved unexpected price increases in most parts of the country. What keeps being kicked down the road is the delinquent rent issue but there is hope this will be resolved without evicting tenants or forcing landlords into foreclosure.
Most investors should be breathing a collective sigh of relief as the calendar turns from 2020 to 2021. Forecasts are that the pandemic will soon begin retreating but will remain a driving force in our lives and the economy into the summer months. Taking what we have learned and what we know about the coming year, now is an excellent time to make real estate investing plans for the New Year.
Two of the basics that will carry into 2021 are that inventory will remain tight and interest rates will remain low. Tight inventory means plenty of competition among buyers. But low-interest rates provide plenty of motivation for buyers to be looking for opportunities. These two opposing forces assure the market will be active.
You can expect 2021 to be another year when more things will change and the basics will remain the same. The basics of investing in residential rentals are:
Generating cash flow. This is what makes rentals attractive to most investors. Rents generate dependable cash flow that enables the other benefits from real estate investing. Namely, positive cash flow pays all of the expenses and leaves a monthly profit in the form of ROI. Positive cash flow pays the mortgage while investors gain an appreciated value. It also pays the taxes, insurance, and maintenance costs. Your job as an investor is to fully understand all of the ownership costs and be sure that the property will still generate positive cash flow. Before purchasing a rental property, you must uncover all hidden costs to determine the ROI.
Collect a passive income. You can decide to do all of the property management and maintenance yourself or hire a professional property management company. Rental properties give you several options. A popular option is doing most of the work during your younger hardworking years and then turning it into a fully passive income for your retirement years. Although maintenance costs may increase as the property becomes older, the rental income also increases while other costs like a mortgage decrease in proportion to the income. Of course, maintaining the property in good repair means less maintenance in later years. As retirement approaches, another option is selling an older property and replacing it with a newer and lower maintenance property (maybe using a 1031 Exchange for tax purposes). Passive income is the strategy of many real estate investors.
Appreciated value. This is a big benefit of generating positive cash flow and should be basic to your investment strategy. Let the renters pay all of the expenses so that your investment property becomes free and clear of a mortgage with a highly appreciated market value.
Investors take the tax benefits. As the property owner, you’re entitled to tax write-offs that include the mortgage interest, maintenance (including property management), depreciation, legal fees, insurance, accounting, and other expenses.
The basics never change but COVID-19 has brought change.
This list isn’t very long but there are COVID related changes that you need to continue dealing with at least for the first half of 2021. Most of all, you need to have CDC guidelines incorporated into your processes. Virtual property tours with 360-degree views of both the interior and exterior of the property were already a trend before COVID and will remain part of the post-pandemic normal. The general process is to screen for tenants while not by having every lookie-loo walk through the property. Have prospects first view the videos and only show it in-person to people that are interested and qualified. When they show up at the door, you have to follow the other protocols for masks, social distancing, sanitizing, etc.
COVID has pushed as much of the process online as possible and you need to stay up to date. Your online presence should always be current and maintained. This includes your website, social media, and marketing materials. Now is the time to polish your brand for the New Year. If you’ll be selling or buying any properties over the next several months, you need to have all of the online tools required to complete the process without sitting down at a closing table.
Dealing with COVID-19 has been unprecedented during 2020 but there will always be breaking news and events happening that affect real estate investing. It’s a balancing act between sticking with the basics and dealing with change. You should expect good things to happen with real estate investing in 2021.
What are your thoughts and insights about real estate investing in 2021? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].