Although coronavirus vaccines are being distributed throughout the U.S. and life is expected to slowly start getting back to normal in 2021, we are still quite a while from the old status quo. That is, if life ever truly returns to normal after living and working at a distance for at least 18 months.
Although financial markets and the real estate market have improved since the March crash, now is a unique time to begin investing in real estate. Moreover, although the economy has been erratic at best, the real estate market has actually experienced a boom. From the rise of remote work to historically low interest rates, people are relocating, and that’s good news for many markets.
In this article, we’ll provide tips on how to invest in real estate during the COVID-19 pandemic and how to prepare for the investment opportunities to come after the pandemic passes.
Working with a real-estate agent
Real-estate investors can lean on the expertise of a knowledgeable local real-estate agent. This rings especially true in our current socially distanced reality.
Realtors will ask for your budget, investment requirements, real estate of interest, etc. and compare with available market options. Ultimately, they will present you with listings that match your goals, help during negotiations, assist with the closing process and work to protect your interests as an investor in the deal.
Depending on the type of real-estate investment, the average agents’ commissions vary between 5-6% of the home’s final sale price. This includes a combined buyer’s and seller’s agent commission.
When I sold my condo last year, I negotiated for a lower rate overall by having the agents agree to a 4.5% total commission rate, which amounted to 2% to my agent and 2.5% to the buyer’s agent. The reduced rate saved me thousands of dollars on my bottom line.
You also have the option to work with a discount broker, which can charge as little as 1%. Going this route has proven a popular choice for many because of the reduced fees for many of the similar services provided by traditional real-estate agents.
The pandemic caused widespread business closures and spurred the rise of remote working as the “new norm” nationwide. The far-reaching changes to business life have caused millions of Americans to move to a new city or state during the pandemic.
Cities where rent and real-estate prices are far above average, such as New York City and San Francisco, have started to look less attractive. And for good reason: why pay high rents to remain locked in your apartment complex? Instead, many have fled to the suburbs or other lower-cost-of-living cities.
This geographic mobility presents an opportunity to investors. When researching where to invest, identify up-and-coming markets and areas with recent population increases. Further, try to find out why these changes have happened and whether they will continue.
For instance: Are multiple big-name companies moving their headquarters there? Has the city recently made serious improvements to infrastructure, schools, etc.? Do they have favorable tax laws for businesses and individuals? Is real estate cheaper there for people working remotely?
These questions can guide you toward identifying ideal real-estate investments for sustainable returns.
Investing in real estate during a pandemic with social distancing orders in place can be tricky. Viewing a property or walking around a neighborhood carries more complications now and the process can move at a slower pace than before as well.
As my wife and I found out during our recent home search, open houses are a thing of the past in many locations. You may only have the option to schedule individual viewings and must sign COVID-19 waivers before entering the property. This means you’ll become very familiar with DocuSign’s digital signing process. Further, you should expect closings and recordings to take longer if our experience is any guide.
Take advantage of virtual tours to look at properties from the comfort of your own personal space, especially if you choose to buy sight unseen. You can use online tools such as Google Street View to “walk” around the neighborhood and get a feel for surrounding businesses, homes and buildings.
Appreciating home values and low interest rates
Real estate across the country had a surprising boom during the pandemic, largely due to people migrating to different areas and historically low interest rates.
Owners want to make returns on their appreciating assets and get a much better mortgage rate for their next investment. Developers want to identify areas to build housing which have seen a high influx of new residents and business activity. Prospective residents want to lock in lower rents, either in the same city, or elsewhere. Every real estate market participant has an interest in getting the best deal for themselves.
In fact, all of these factors continue to drive up home prices, so it might pose some difficulty for some buyers to get a budget-friendly deal. In this instance, hiring a local real-estate agent who knows the market well can come in handy. A capable agent will help you identify the right type of investment property and negotiate for the best price.
Choose the right investment
Choosing the right type of real-estate investment is crucial to making returns. How do you decide which type of investment is right for you? In addition to setting your budget and determining the amount of time you’re willing to dedicate, you must also do market research and analysis.
For example, right now, the pandemic has significantly slowed down the leisure travel market, so it might not seem like the best time to invest in a vacation rental if you’re looking for quick returns. Long-term rentals, however, could be a smart idea in up-and-coming markets as a result of the migration from high-cost cities.
If you want a larger investment and have the time and funds to do so, then you may consider purchasing commercial property (such as investing in apartment buildings or retail space) in areas that have seen a large influx of new residents.
You may also want to consider passive investing through publicly traded REITs on free investing apps or crowdfunding platforms if you do not have the time or the funds to take care of a physical property.
Get your finances in order
Investing in property will require proper financing, so you should check your credit score and evaluate your assets before starting. If you want to purchase physical property, you’ll need to save money for a down payment, closing costs and at least six months of cash reserves. You can also explore whether it’s a good idea to pay cash for a rental property.
If you want to get financing through a conventional loan, lenders typically require more money down (around 30%) and will not factor in future rental income into your debt-to-income calculations. These assets will help to grow your generational wealth, but the regular rental payments likely won’t factor into the lender’s decision.
If investing in a new property is contingent on quickly selling your current house, the current seller’s market should play in your favor. Though, timing your two transactions can pose a difficulty. Thankfully, the extended close periods can work in your favor if you need to buy time searching for a house.
You will also want to take into consideration how much money it will cost to sell your house. Between remodeling and repairs, Realtor commission fees, closing costs and capital-gains taxes, the numbers add up quickly. So, you’ll need to keep these calculations in mind when searching for your next property.
How to invest in real estate during COVID-19
Whether you have significant investing experience or you have never purchased real estate before, purchasing real estate rarely comes as a cake walk. With the added pressure of the pandemic, you must have vigilance in your search and with your budget.
You do not want to get caught up in the hype if you do not actually have the time and money to dedicate to your investments. So, plan well and work with an agent you trust who can help you get the job done.
Fortunately, now is actually a great time to invest if you do your research, qualify for historically low interest rates and grab a great deal.
Riley Adams is a CPA and the author of the Young and the Invested website, which focuses on financial independence and investing.