How Will COVID-19 Impact Real Estate in 2021?
Full disclaimer, like other real estate investors, I have no crystal ball. I can’t entirely agree that the sky is falling, but many feel Chicken Little’s sentiment due to the insane events we have lived through for the past year.
Yet now is one of the most exciting times in history to be in real estate.
While many are running around screaming, “The sky is falling,” you can be positioning yourself to make your first or next million through real estate. My purchasing has not slowed down in the past six months, and my only regret is that I wasn’t scooping up deals in April 2020 during the initial lockdown.
COVID-19 has rocked the world. While we have witnessed illnesses, deaths, and thousands of business closures, we have not seen an extreme shift in the booming real estate market other than the six weeks of decline for April thru May 2020.
So how do the next 18 months look based on the facts?
$3 trillion in printed money in 2020 equals inflation.
Never in history have we come close to the massive amounts of money being printed in 2020. While it has served to keep people afloat during the shutdown, there is no way it cannot have a massive effect on the economy.
With the amount of money printed, the dollar is becoming less and less valuable. The explanation is simple: “By printing extra notes, a government increases the total amount of money in circulation. If that amount does not follow an increase in production, there is more money to spend on the same amount of goods and services as before. Everything costs more; thus, our money is worth less,” explains PocketSense.
There is no way the government will quickly balance this debt, which means inflation will continue to rise. As the vaccine is only starting to get out to people, the dragging economy could continue for at least six to 12 more months. Many experts predict the economic slump may drag on for years.
This point is so significant and I want to ensure that you understand the magnitude of its impact. When you think about supply and demand principles that drive the economy, having too many dollars causes the exchange of goods to rise significantly. When it cost you $8 to buy a cup, you still get the same cup, but it takes more of your dollars to get it.
Inflation was known to run about 2-3% a year in recent history. At 2% annual inflation, a candy bar that costs $1 today will cost $1.02 this time next year. “While a two-cent increase in the price of a candy bar sounds trivial, inflation affects the price of potentially everything: groceries, utilities, gas, clothing, eating out, a new car, home repairs, rent, travel costs, you name it. It adds up fast,” explains the Tennessean.
How Will Inflation Effect Real Estate?
As inflation occurs and the costs of goods and services rise, real estate prices will go up. As real estate purchase prices increases, so do rents, which is good news for landlords.
Unlike any other time in history, there are many variables at play thanks to COVID-19. And as we walk through unprecedented times, we all need to be paying attention to our next financial moves. You will get higher rents, on the plus side, but you also need to pay more to get into a property.
Unless, of course, you can find a deal. You can speculate that those are coming as well.
Another benefit to buying real estate now is offsetting the devaluation with hard assets. It is also a good idea to look into commodities, gold, and Bitcoin, but since anyone reading this has likely caught onto the idea that real estate is the best way to grow wealth, now may be the best time to start buying.
The End of the Moratoriums
Before everyone heads for the courthouse, we need to understand that there still may be a bit more of a waiting period as more stimulus pours in. Biden has already announced he will extend the eviction moratorium and ban on foreclosures until September 2021.
Looking ahead 18 months, with many landlords who will not have received rents for the entire duration of COVID-19 and are currently on an extension with their lenders, many won't be able to catch up on the loss of rents. Those landlords will sell, go into foreclosure, or negotiate agreements with the lender. To qualify for an extension of a loan, say from 30 years to 32 years, the landlords will need to be eligible for the loan. If they aren't, they will likely need to resort to the first two options.
As an investor, you should be anticipating a lot of movement in the real estate market in 18 months. Position yourself now with cash, a strategy for where you are going to buy, and connections for access to inventory.
Emerging Real Estate Opportunities
Sitting on the sidelines is one strategy; another is to start looking at what industries have already seen the effects of COVID-19. Two opportunities may be in hotels and commercial retail.
Because these two asset classes are vulnerable and hurting right now, many are staying away. The savviest investors are taking advantage of the drop in prices. Warren Buffet says, “Be fearful when others are greedy and only greedy when others are fearful.”
The hardest thing to do is go against the herd, but the most significant wins may be available now. Once everyone realizes how to monetize here, it will be too late to get a great deal.
There is more risk in purchasing this asset class now. Based on the high unemployment rate, lockdowns in individual states, and social distancing, values could continue to dip for some time. If you can figure out a way to reinvent this real estate class, you could come out as a massive winner in the years to come.
Some investors are looking at creative ways to manage the shortage of housing by converting hotels into residences. Others are taking vacant buildings and renting them out. In BiggerPockets Podcast episode 434. HGTV’s Scott McGillivray talks about how he is picking up mom-and-pop resorts in rural areas at a discount and revitalizing them as great weekend getaways.
All-Time-Low Interest Rates
While the government continues printing money and interest rates continue to drop from an already all-time low, the more money you can get your hands on to invest, the more real estate opportunities you have to invest in.
That said, it is never a good idea to overleverage to a point where you can’t afford to cover your loans. You need to crunch your numbers harder than ever, because while there are a lot of opportunities, there is vulnerability.
There are many options to access cash right now, including a HELOC or a cash-out refinance. If you don't have access to those, spend time educating yourself, getting access to deals, and networking with people who have cash and are eager to join with others as a passive investor. Many people sitting on the sidelines with money are ready to partner with you on a great deal now more than ever.
Out of every shakeup in our economy, there comes a transfer of wealth. New businesses and investors emerge as leaders with large profits. The key is to anticipate and pay attention.
Also, educate yourself about the facts of the implications of this massive printing, a world lockdown, a forbearance in foreclosures, and a government that will continue on the trajectory of funding businesses and people with printed dollars for the next eight months.
There is no crystal ball, and the sky is not falling; make sure you continue to move and shake with the changing times.
Article Source: Bigger Pockets