They say real estate is always a safe investment, but is that still true during a pandemic? If you’ve been thinking about sinking a nest egg into real estate, you might be understandably concerned about what the coronavirus means for your investing plans.
To examine the idea of real estate investing in the era of coronavirus, we researched past economic downturns and spoke with real estate agents on the front lines. Karl Forell, an agent with thirty years of experience in Lansing, Michigan, and Danii Sedillo, a Certified Residential Specialist in El Paso, Texas, helped give some perspective during these unusual times.
What challenges exist for real estate right now?
The market has slowed down significantly pretty much everywhere, even in places where real estate sales are allowed to proceed more or less as normal. Because of the global pandemic, overall consumer confidence is low, which means buyers are showing hesitance to make purchases, especially large purchases like a home.
Sellers are also demonstrating a reluctance to list their homes. For example, recently, two of Forell’s clients who had intended to list their home backed out and decided to wait. At the same time, inspections, appraisals, and home tours are all affected by social distancing initiatives and stay-at-home mandates. Sedillo says that an appraisal that would’ve taken 10 days to acquire is now taking up to three weeks.
In addition, mortgage lending standards are changing, including new overlays that increase the minimum required credit scores, the necessary documentation, and the down payment percentages for mortgage loans.
That said, in previous economic downturns, the real estate market has outperformed the stock market. The exception, of course, would be the Great Recession of 2008, where house prices plummeted by 33%.
Experts anticipate that a recession tied to the coronavirus will behave more traditionally, however. (Factors leading to the Great Recession were heavily influenced by housing, whereas today’s economic crisis is not as closely linked to the real estate sector.)
What does that mean for you as an individual investor? Well, it means that implementing a real estate investment strategy could prove profitable in the long run. But you’ll need a solid plan, some creative problem-solving, a healthy level of liquidity, and a good understanding of your local market.
What’s your investment plan (and your challenge)?
Small real estate investors usually fall into one of two categories — flippers and landlords. Flippers buy homes at a low price point, make necessary repairs and renovations, and then sell the homes, presumably at a profit. Landlords buy homes with the intention of holding the property over a long period of time and profiting monthly from rental income. During the COVID-19 pandemic, both types of investors face unique challenges to their business plan.
Flip and resell
Depending upon the local market, fix-and-flippers may find some good real estate values as the supply increases due to uncertainty in the market. Houses may sit “for sale” on the market as buyers wait out the hesitancy of the pandemic.
Sellers usually demonstrate a greater willingness to negotiate when their homes sit on the market for a while. But as mentioned, sellers in some areas may also be reluctant to list because of the volatile nature of the economy. Talk to your real estate agent, and check out our guide to buying during coronavirus for more assistance.
The challenge: Investors intending to flip a home need to be pretty certain of their timelines. It may be a race against the clock if even a small drop in home prices is on the horizon. Can you get the house finished, listed, and sold quickly?
In addition, Sedillo points out that you’ll need to consider the potential for labor and supply shortages in your area. Increased delays mean a loss of money for flippers, as carrying costs add up over time.
Buy and rent
Historically speaking, the rental industry maintains a general level of stability during economic downturns, so buy-and-hold investors might be able to use rental property as a supplementary source of income during these uncertain times. Potential landlords who can pay cash for a property and rent it quickly may be able to experience the benefits of rental property investment.
The challenge: Then again, these are unprecedented times. The previously strong rental industry may be in jeopardy due to renters who have suddenly lost income and can’t pay rent. In some areas, lawmakers have made it illegal to evict tenants who cannot pay due to the coronavirus. If you hold a mortgage loan on your income property, that means you could be facing payments you aren’t financially able to make without rental income, though you can apply for mortgage relief as the homeowner.
How’s your liquidity?
When it comes to thinking through the pros and cons of investing during this pandemic, Forell says it all comes down to how much disposable income you have available.
Do you have enough to weather a financial storm? Ask yourself the following questions:
- Do you have savings to cover your personal expenses for at least three months?
- Do you have enough set aside for potential medical emergencies?
- Is your job situation stable, or is your industry anticipating layoffs?
- Do you have dependents or other family members who will need financial support in the coming weeks or months?
- Are there other assets you should consider selling in order to unlock liquidity?
Investing in real estate may prove better than investing in stocks at this time — but only if that investment does not overextend your personal liquidity. With financial uncertainty on the horizon, a large non-liquid investment (such as a house) should not supersede your emergency funds, even if that investment has the potential to turn a profit. If necessary, talk to a financial advisor about your personal financial situation.
How’s the local market?
The real estate market is intensely local, and the effects of the coronavirus are likely to be intensely local as well. In areas where most of the residents worked in a single industry that was hit hard by the pandemic, investors might lose money. In areas where residents have more balanced sources of income, investors might find opportunities.
The future is always uncertain, but that doesn’t mean it has to be bleak.
“Assuming the virus goes away and we all go back to work, we are at a perfect time to buy and sell.” Forell says. “As a seller, the market is high when compared to the last seven years. As a buyer, we are at an all-time low for interest rates.” Rates around 2.5% to 3.5% add up to big savings, assuming buyers can meet additional loan requirements. Combine these general observations with local realities, and real estate investment during the coronavirus might be a good idea.
For the potential investor, the best resource during this time is an experienced and top-performing real estate agent. Your agent will be the best source for accurate, recent, and localized advice to help navigate the investment property market. No one knows the future effects of this pandemic, but the help of a local expert can turn a decent guess into a wise strategy.
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