How the Pandemic has Changed Real Estate In 2021
Successful entrepreneurs see opportunities where others don’t. Throughout history, the rich often made their money by building successful businesses and then holding and accelerating that wealth through real estate investments.
While everyone else is panicking and worried about a market crash, you’ll see entrepreneurs and real estate investors excited and ready to find some deals. This is a great time to be looking for real estate investments.
What some people forget is that the tax laws offer benefits to real estate investors who provide housing for employees. It also rewards investment in commercial buildings since the businesses that typically operate out of those buildings stimulate the economy.
Another interesting point of view when it comes to real estate investing is your income. Most people don’t realize that you can earn four different types of income through real estate.
- Your tenant’s rent, less operating expenses (cash flow from real estate or net operating income)
- Depreciation deductions that offset income (called paper losses or phantom income)
- Amortization (your tenant paying down your mortgage debt
- Appreciation (capital gain or increase in value of real estate over time)
The key lesson here is that my formula for investing in real estate stays the same no matter what happens in the market—pandemic or not.
But we all know a real estate crash is coming. The problem is we don’t know when. One of the more popular predictions floating around is that investors are now moving out of real estate and back into the stock market.
Another prediction, which I think is valid, is that the real estate market is set to crash because of the high costs of building materials. But such rumors only affect those investors who, as Buffett says, “take their cues from price action rather than from values.”
Ken McElroy, my advisor on real estate, says to watch for these four things if you want to start investing in real estate:
#1 Fed Reserve will be investing in 2021
“The first thing is they’re purchasing assets right now so one of the reasons that the stock market is on the rise right now is because the Federal Reserve is investing in the stock market and creating what many people think is a “fake market.”
#2 Interest rates will remain low
“One of the Fed’s primary objectives is to manage interest rates. The primary reason I say this is that Jerome Powell, the chairman of the Federal Reserve, has said so multiple times. There’s an article that you can see here, where he says the Fed pledges low rates for years until inflation picks up. The Federal Reserve’s latest economic forecast suggests that interest rates will remain zero at least through 2023.”
#3 Inflation will rise
“So I believe that we’re going to see a rise in inflation and here’s why…On August 20th of 2020 the Federal Reserve came out and said it will likely aim to achieve inflation moderately above two percent for some time. Okay, that’s the statement that we haven’t seen before. That suggests that the Federal Reserve is going to be a little looser about the inflation policy. We know that they want to keep interest rates low and we know that they want inflation to rise.”
#4 Unemployment will stay high through 2021
“With 100,000 businesses permanently closed, we’re going to continue to see unemployment stay high. Right now, they’re reporting 6% unemployment but I believe that number is higher if you consider the people who are underemployed—meaning they had a full-time job and now are only working part-time.”
What does all of this mean?
All of the factors that Ken mentioned above will impact real estate. But the major component to look for is what are the policies of the Federal Reserve.
The key to surviving 2021 if you plan to invest is to understand that debt is an asset and cash is a liability. It’s the reason I say “savers are losers.” With the Fed printing more and more money, cash is trash. If you can understand that, then you will be better off.
We’ve had almost six years of increasing home rates and higher interest rates for the past two years. It has been challenging for all types of homebuyers these days.
With that said, affordability is forcing many to move back in with family, or to a state that has more affordable housing.
For example, in Phoenix, AZ where I live, affordability was already a problem before coronavirus. It was reported in early April that 65% of Phoenix residents couldn’t afford housing, and according to the “Los Angeles Times,” it is estimated that “as many as 30% of Americans with home loans—about 15 million households—could stop paying if the U.S. economy remains closed through the summer or beyond.”
Student loan debt and skyrocketing housing prices were to blame for millennials planning to rent forever. 12% of millennials plan to “always rent” and the majority cited affordability being the issue.
So with millions out of work, some businesses still shut down, it is unknown what the actual aftermath will be.
Before the coronavirus outbreak, real estate was already seeing the effects of migration from one state to another. It’s a natural thing. When the cost of living goes up, people move elsewhere.
Big cities were already losing population. For example, New York has lost a net 1.4million residents since 2010. Nearly 181,000 in 2018-19 alone. Because of the coronavirus, many people are leaving high-density areas for fear of catching the virus. Additionally, many people are returning to their home states because they are being forced to move back in with their parents.
A combination of residents who had already planned to move out of high-density states like New York and those who are forced to move has accelerated the typical migration numbers that affect real estate.
Pay attention to migration patterns of both retirees and millennials, these trends will create supply and demand imbalances in certain areas which can often be very helpful for your investment choices.
Retirement marks a new phase in a baby boomer’s life, and it seems only natural to relocate or move to a new home when they transition away from their primary career, or the day-to-day rearing of school-aged children. Historically people have also moved to areas with moderate climates, like California, Arizona, and Florida. Oftentimes people are tied to certain areas due to family and jobs until they retire, then they decide where they want to live.
“Work from Home”
Once packed business campuses are all but ghost towns. Now more than ever, commercial real estate is feeling the ripple effects of the pandemic.
Commercial real estate used to be the playground for the rich. Now, empty buildings are causing great concerns for investors.
The major cause of fear is that there is still so much uncertainty in the market. Some experts predict that “work from home” for many businesses is here to stay as they’ve been able to continue business-as-usual while their employees set up home offices.
Very early on, Jack Dorsey, CEO of Twitter, announced that they would be able to continue to work from home as long as they see fit.
At Rich Dad, our team is still working from home and only coming to the office to pick up mail or record a radio show.
Things are subject to change for many of these companies. But for now, the outlook for commercial real estate is unknown.
I’ve said many times that I love market crashes because that’s the best time to buy— finding true value is a lot easier during such periods. And during a crash, many people start selling so they’re more willing to negotiate and make you a better deal. Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so.
I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks. Today, with gold above $1700 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.
My point is that this current period is a tough time to buy or sell. Real estate is high, interest rates are still relatively low, the stock market is very shaky, the U.S. dollar is low, gold is high, oil and gas are high, and there’s a lot of money looking for a home.
So the lesson is: As I said in the beginning, now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy. When prices are high, value is a lot harder to find—which means you need to be smarter, more cautious and resist your knee-jerk reactions.
A reminder from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.” In my opinion, there are many naked swimmers, especially in the real estate market.
Editor, Rich Dad Poor Dad Daily