Why 2021 Is a Perfect Time to Invest
Renters Warehouse Blog
Why 2021 Is a Perfect Time to Invest
“Is now a good time to invest? What’s happening with the housing market? Should I wait to buy?”
These questions, and more, are always at the forefront of investors’ minds. Knowing when to invest can be a challenge, even at the best of times. Add in the ups and downs as we’ve seen over the past year, and it can be even more difficult to know whether now is a good time to buy. Should you hold out and wait for things to stabilize or jump now while interest rates are still low and before housing prices climb higher?
While there has been a great deal of speculation on where the market might be headed, we believe that there are a number of factors that indicate that 2021 is shaping up to be a good time to own, and even invest in real estate.
From a national point of view, the housing market has held strong over the last year and into this one.
Despite the uncertainty of 2020, the January S&P/Case-Shiller Home Price NSA Index, which covers all nine U.S. census divisions, reported an 11.2% annual gain in January, up from 10.4% in the previous month.
Of course, while it’s important to consider the national housing market, real estate investments are very much local and vary considerably from market to market. The viability of investing in 2021 depends largely on where you’re planning to invest, how you structure your financing, and how well the property in question aligns with your own investment strategy.
With this in mind, let’s take a look at what the experts are calling for in 2021, and see what’s happening in housing markets across the U.S. We’ll also take a look at some things that you’ll want to consider to help you find the best possible investment.
National Housing Market: The Case-Shiller Home Price Index
As we’ve seen, the Case-Shiller Home Price Index indicates that nationally, housing markets are performing well.
“The trend of accelerating prices that began in June 2020 has now reached its eighth month and is also reflected in the 10- and 20-City Composites (up 10.9% and 11.1%, respectively),” says Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The market’s strength is broadly-based: all 20 cities rose, and all 20 cities gained more in the 12 months ended in January 2021 than they had gained in the 12 months ended in December 2020.”
Inventory, or the number of houses available for sale, is also tightening in many areas. In January, inventory hit a new bottom of 1.03 million units, according to the National Realtors Association. During the winter season inventory often increases, but that didn’t happen this year according to NAR Chief Economist Lawrence Yun. In fact, inventory dropped 29.5% in February year over year; representing the largest annual decline on record. Currently, this means there is a two-month supply of inventory at the current sales pace.
Some experts say, however, that a slowdown in pending home sales and potentially rising interest rates could put a damper on how quickly home prices grow over 2021.
BofA Securities expects existing home sales to cool this year, homebuilding to increase, and price appreciation to moderate.
So is 2021 a good time to buy? That depends: on your investment strategy and where you’re buying. From a long-term perspective, it also depends on the price of the property in question and the projected returns.
- Urban Migration
- Migration to More Affordable Housing
Let’s break these down now:
- Jobs: “A lot of jobs are never coming back,” writes Winzer. “Businesses have learned to work with fewer employees as the pandemic super-charged a trend already underway before the recession. Many of the lost jobs are in retail and at restaurants but high-paid computer engineers also are affected. Yes, the economy will eventually create other jobs, but that won't help people in 2021.”
- Urban Migration: Despite the pandemic, many people are still drawn to cities. “Even though the pandemic showed that many jobs can be done from anywhere, people and businesses still want to be near the infrastructure, the social activities, the access to premium healthcare,” Winzer writes.
- Migration to More Affordable Housing: Of course, the city isn’t for everyone. “People will move where the jobs are, and away from expensive housing,” writes Winzer. “For decades, young people moved from the Northeast to Texas and Florida. Recently they’ve been leaving California. With a lot of unemployment, a lot of people will be on the move.”
We’ve seen this with the growth in demand for what have traditionally been second home markets in the U.S. Places like Aspen, the Hamptons, and Miami have been seeing increased home-buying activity. Some of this demand is from people looking to relocate to second homes, but it’s also from people who are looking to buy their primary residence in these areas. With the work from home trend, more people are giving up the big city life and settling for a more relaxed environment in suburban or even rural neighborhoods. Since a commute for some is no longer an issue, neither is being close to work. People are also looking for more space and leaving their apartments for homes with more space. Investing in the right rental property now could give you access to a larger pool of potential tenants.
Wondering about timing the market? Here are some things you should consider if you are waiting for the perfect chance to buy: Timing the Market - Is It a Good Idea?
What to Look for When Assessing Investment Property in 2021
Now, let's take a look at some of the things you should be aware of when buying an investment property at this time. While some things remain the same, a lot of things look different as renters (and buyers) are seeking different things.
- Assess the Location
Location has always been crucial. But some places today may experience higher than average vacancy rates, due to job losses among renters.
Take a look at Ingo Winzer’s Market Analysis of places to consider for rentals in 2021. His list includes areas where job loss in 2021 is expected to be minimal, based on the percentage of Covid-vulnerable jobs coupled with job loss since November 2019. He puts places like Boise City, ID; Austin, TX; Salt Lake City, UT; and Indianapolis, IN on the list. Of course, you’ll still want to do your own research, but since jobs are a crucial part of rental demand, this list is a great place to start.
- Look for Amenities
When buying a property, consider also amenities that matter to people. While locations that were close to public transit systems and workplaces were popular not that long ago, the desire for quiet neighborhoods and lots of outdoor space has since become a priority for many. When looking at single-family rentals, consider features like a quiet neighborhood and plenty of outdoor space. Extra bedrooms and bathrooms also make sense. With more people working from home, and spending more time there, having dedicated office space is extremely appealing.
- Find Numbers That Make Sense
The one thing that hasn’t changed is the numbers. It is still important to make sure that the numbers add up and that you’ll be getting the returns that you’re looking for before you dive in. Just because a property is affordable, doesn’t necessarily mean it’s a good investment. A lot of places will see a boom of properties for sale as people leave the area due to a lack of jobs. Keep this in mind as you seek out an investment. Take a look at employment figures and job diversity before you commit.
- Expect a Learning Curve
If this is your first investment, you should be prepared for a learning curve, regardless of how much research and reading you have done. Becoming a landlord for the first time comes with a lot of new and unfamiliar territory. While you don’t have to be an expert in every area, it can be helpful and beneficial to familiarize yourself with the laws and regulations in the area you are investing, as well as to consult professionals to help ensure that you are on track with how you plan to handle complicated situations. If this sounds like a challenge or something you’d rather sidestep, then just be sure to factor in the cost of property management when running the numbers on potential properties.
- Plan for Potential Vacancies
Regardless of the location, there is always a risk of vacancies. Be sure to factor vacancies into your spreadsheet when running the numbers. In today’s market, the chance of vacancies is especially high in areas that are most likely to be impacted by job loss, so be sure to take a look at the markets that are expected to be minimally disrupted, (See Ingo Winzer’s list). Then dial in your research at a granular level to ensure that the neighborhood, property price, and rental demand, are healthy.
Want to learn more about how to limit your vacancies? Consider reading: Tips for Filling Vacancies, for some practical tips and strategies.
- Consider the Mortgage Rates
In 2020, mortgage rates hit a record low of 2.99%. While rates have risen a bit over the past year, they still remain relatively low. If you’re planning to finance your purchase with a conventional loan, now would be a great time to jump on board and lock into a low interest rate. Of course, for all-cash buyers, this is irrelevant.
Tip: One of the best ways to secure a low interest rate is by having a high credit score, and by making a large down payment. If it’s your first time buying property, you may be able to qualify for a lower down payment, but for investment properties, the bank will usually want to see 20%, or even higher. A high down payment will also help to protect you from any unexpected fluctuations in the market
General Benefits of Owning Real Estate
Finally, let’s take a quick look at some of the general benefits that come from investing in real estate. Regardless of the year, owning an investment property can offer some great benefits. Just make sure you’ve done your research, run the numbers, and structured your purchase carefully.
- An Additional Income Source
If you’ve run the numbers and secured a good property with a favorable loan, then you’ll be able to benefit from another source of income. Not only can this income help pay off the mortgage, but it can also help you grow your portfolio. The rent will count as income, which could help you to qualify for an additional loan for your next rental property.
- Tax Benefits
Investing in rental property also opens up a world of valuable tax breaks. The IRS allows you to deduct a number of expenses that are related to your rental property. You can deduct insurance, interest (mortgage interest, as well as interest on loans or credit cards that are used for the property), and repairs. Upgrades can be deducted too, but they’ll need to be claimed over a few years, instead of all at once. Claiming some of these deductions can help make tax season a little easier and help lower your overall bill.
Some available deductions that you may be eligible for are:
- Interest (Mortgage)
- Interest (For other loans)
- Utilities (If you pay them)
- Repairs and Maintenance
- Upgrades (Must be depreciated and claimed over a number of years)
- Depreciation on the Building
- Professional Services (Property management, accounting, legal services)
- Travel (To and from the property)
- Casualty Losses
- Operating Expenses
- Employee Compensation
- Gifts (Up to $25 per tenant, vendor, or employee per year)
Of course, it is important that you read and understand the stipulations included with these deductions. Having a firm grasp on what you are deducting and why can help save you from a lot of headaches in the future. See: Filing Your Taxes When You’re a Landlord.
Appreciation is another crucial benefit of rental property. Keep in mind that some markets experience stronger appreciation than others. Some rural places, particularly in the Midwest tend to see minimal appreciation, but many areas have seen property prices skyrocket in recent years. If appreciation is a part of your investing strategy, then the most important thing you can do is to conduct careful research on the local housing market and neighborhood. Take a look at historical values for homes in that area. See what’s happened over the last ten, twenty years.
Use Renters Warehouse’s Research Center tool to discover this information.
While it’s tempting to sit back and wait for the market to cool, just make sure you don’t miss out altogether. Real estate is always local, which means potential investments should be assessed with local economic factors in mind. Ensure that you do careful research on the area and assess the health of the local housing market.
Finally, run the numbers to ensure that it’s a solid investment, and try to make a healthy down payment; in order to qualify for a good mortgage rate and crucially, to help insulate yourself against any fluctuations in the market.
Considering investing? Let Renters Warehouse help make the process easier. We offer tools and advice to help first-time investors get started, and investment portfolio services to make investing in SFR at-scale easier than ever. Search our inventory to find available properties for sale, then head over to the Research Center to assess the health of the local housing market.
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