If there’s one thing that real estate investors know, it’s that when times are good you make money on equity, and when times are bad you make money on financing. Now, during the most turbulent time in our recent economic history, we have the opportunity to do both.
COVID-19 has had an unprecedented effect on the global economy, and despite the initial fear we all experienced, the residential real estate market is still going strong. In fact, there’s more opportunity for investors than ever before. Not only have we seen interest rates drop to near-historic lows, but also there’s been virtually no erosion of equity across the board. So what does this say to me?
It’s time to strike while the iron is hot.
With the instant opportunities that currently exist—money is cheap and homes are holding their value— there’s been almost no better time in history to use leverage as an opportunity to invest. Homeowners can pull existing equity from their homes and use it to invest in any number of income-producing properties.
This doesn’t mean homeowners should pull out huge mortgages if they are not financially prepared to do so, but getting set up with a home equity line of credit means having access to capital should a profitable opportunity come up. Whether it’s a dedicated income property or a vacation home, being able to jump on a good opportunity without having to scramble last minute for funds is a great advantage.
Keep in mind though, that in order to increase the odds of success, long-term thinking is essential. House flippers and those trying to make a quick buck may find their investment methods aren’t as secure as they were pre-COVID. There is still a lot we don’t know about how the economy will recover, and thinking long-term is an important component of any investing plan.
…thinking long-term is an important component of any investing plan.
That said, there’s one area where the answers aren’t quite as clear for investors: commercial real estate. This area is going to be tricky over the next couple of years while we learn what businesses can survive and which can’t. We used to look at investing in what we would call “Amazon-proof” commercial real estate, meaning things you can’t necessarily buy online. Now, given the impacts of COVID-19, we have to go one step further and say that it not only has to be Amazon-proof, but also pandemic-proof. If it isn’t part of an early phase opening or an essential service, then it’s not necessarily a good investment anymore. This isn’t to say that there isn’t still money to be made in commercial real estate, but the long-term effects of the pandemic aren’t yet clear.
In the coming months, government subsidies will likely be scaled back, mortgage deferments will need to be paid, and there will be a point when the reality of the numbers, whether it be the unemployment rate; debt-to-household ratio; or the amount of taxes people owe on income they no longer have, will sink in. This reality will likely lead to some volatility in the markets. Typically, when this type of situation arises, the markets see a drop, and then a quick bounce-back as people take advantage of those opportunities. At this point, I don’t see why this scenario should be any different.
We can all make our predictions and read the forecasts, but since we have nothing solid to compare this situation to, none of us can say for sure what will happen. But as far as I’m concerned, where there is uncertainty, there is also an opportunity, and those with the courage and the financial clout to act stand to make significant gains.
