Is 2021 a Good Time to Invest in Real Estate?

Image by Nattanan Kanchanaprat from Pixabay

During the pandemic of 2020, millions lost their jobs, and many more lost their hours or ability to move up in terms of income. On the flip side, the investment markets did really well. Since there was less opportunity to spend money, many households had more cash than usual to spend on stocks on bonds.

Does this sound familiar? Do you have extra money or resources to put into residential real estate investing in 2021? Even if you do, is 2021 a good time to invest in real estate? The short answer is not as much as usual, but that’s not a no, if you do it right.

Why Invest in Residential Real Estate?

Investing in residential real estate offers many perks that you should know of, especially if you’re not following the flipper crowd inspired by what they see on TV.

Cash Flow: This is your net income following operating expenses and mortgage payments. As your equity goes up and the mortgage goes down, your cash flow gets stronger over time.

Tax Benefits: Many costs involved with the ownership, operation, and management of a residential property are tax-deductible.

Appreciation: Real estate can make you money in multiple ways when done right. Rental income is often the primary way, but property value appreciation over time is certainly another. You can profit while you hold a property and again when you sell.

Compounding Possibilities: Rental income and growing equity means you get more leverage over time. One property can turn into two, and two can turn into four.

Diversified Portfolio Options: Real estate markets don’t follow the same ups and downs as other primary asset classes. In fact, they often swing in opposite directions. Even when stock markets are down, not only will you have money parked somewhere else entirely but in a place probably doing well.

Hedge Against Inflation: When GDP grows, so too does demand for most real estate. You can pass inflationary pressure to your tenants and also convert it into capital appreciation.

2021 Residential Real Estate Opportunities

The pandemic has demonstrated how much work can be done in many jobs from anyplace, but with people doing that and spending more time at home, the demand for good homes is higher than ever.

Urban migration will keep going through the pandemic and after. People still love living near healthcare, amenities, social activities, and quality infrastructure.

Affordable housing is the other big migration. This is happening from expensive states to cheaper ones as well as from dense city cores to more spacious suburbs. Many are now fleeing California and buying homes in Scottsdale, Arizona, and Fort Worth, Texas.

In particular, Dallas, Cincinnati, Kansas City, and even Cleveland are seeing interest from those moving from elsewhere. Closer to home, keep an eye on the suburbs around any big cities in your market.

Having said that, try and avoid the bottom of the renter market. Demand for rental homes goes up as the price of homeownership goes up. However, renters move on average every two years. Renting to someone now can mean owning a vacant property by 2022. Aim for the market median and slightly above instead.

Price increases for 2020 were modest, suggesting 5 percent gains in both 2021 and 2022. Avoid the crowds looking for high-potential flips. You’re better off looking for older homes that can be rehabbed into a high sales value.

Don’t snub vacation rentals, if you feel so inclined. Properties with ‘four seasons of opportunity’ can provide year-round income, even if it’s inconsistent. Specific areas of potential growth include the following:

-Northeast Pennsylvania in the Pocono Mountains

-North Carolina’s Outer Banks

-Nevada/California around Lake Tahoe

-Maryland’s Eastern Shore

-California’s Big Bear

Don’t Go It Alone

You need a good realtor at your side. Ideally, you’ll have a great realtor instead.

Look for a veteran agent. Novices are more likely to make mistakes than someone experienced. For that matter, find a real estate agent who is an agent themselves. While they might help families find places to live, a fellow investor will see the property world from the same angle you do.

Questions are key when first meeting realtors. How long have they dealt with investment properties? What niche were they in? How many deals have you done? What kind of ROI do you get?

Questions are a great start, but they’re just that. Also, look for specific things in any potential realtor. Not all of these are deal-breakers, but they might be:

-CCIM: Certified Commercial Investment Member designates expertise in the field of commercial real estate investing. Such a professional might help you branch out of residential possibilities, especially as abandoned or vacant retail spaces get reclassified for residential possibilities.

-CDPE: Certified Distressed Property Expert denotes expertise in buying distressed properties so they can be fixed up. These are great professionals to work within the residential sector.

Strong knowledge of the local market, the ability to conduct great showings while also moving into actual negotiations and deals, personal rapport, constant communication, and a long string of positive reviews online are also good things to look for in a realtor.

Preparing Yourself Financially

You always hope to make money in residential real estate investing, and you should always be looking to do so. However, for all the potential upside, this should never be the only egg in your basket. Also, never invest money you can’t afford to lose. Follow these guidelines before looking for any deal:

Budget Your Money: This is where you make sure you have enough to safely risk without actually risking your own home, emergency savings or basic retirement security.

Raise Your Credit Score: Credit scores under 620 might not even get approved for investment lending at all. Credit scores over 740 are going to get better interest rates and save money over time. Clean up your credit reports, and pay your bills on time.

Get Preapproved: Knowing your own budget is the first half of knowing how much you can spend. Getting preapproved means knowing how much you can actually finance. Find good deals between your financial floor and ceiling to avoid biting off more than you can chew.

Avoid PMI: Private mortgage insurance can seem like a good way of investing without the usual 20 percent down payment. However, it actually costs you more money over time, sometimes by several percentage points. That’s thousands of dollars down the drain when you could just clear the 20 percent hurdle instead.

Want to Dip a Toe in the Water?

If you’d like to start investing in real estate, but you don’t have enough money or the desire to own and manage your own properties, then there is another option. REITs are real estate investment trusts. These are publicly-traded investment opportunities bought and sold on the primary stock exchanges, often with high trading volume. That means easy ins and outs of positions for you.

REITs have to pay out at least 90 percent of all income to their investors, so they let you take advantage of the real estate market in a way that usually provides better dividends than blue-chip stocks. They’re a great way to get exposure to the market and save and even grow your powder until you’re ready to pull the trigger on an actual deal.