There was at least one upside to the turbulence of 2020: the housing market ended on a high note, capping off a good year for real estate investors in fast-growing markets.
Many real estate industry experts across the country expect those trends to continue into 2021. Mortgage rates, which remain historically low, may start to climb eventually, but will likely stay low for the foreseeable future. The ongoing high demand and limited supply of available homes will keep driving higher housing prices. Economic fallout from the pandemic means that inventory may open up as those affected by COVID-related job losses are forced to sell their homes, and may also contribute to the booming rental market. Conditions continue to look favorable for investors building passive income over time with the Buy, Rehab, Rent, Refinance, Repeat (BRRRR) method.
While no one has a crystal ball to see what 2021 has in store, here are a few tips that will help real estate investors whatever the year brings.
Start with the right property.
In a hot real estate market with rising home prices and strong buyer demand, it can be tempting to overpay for a single family or multi-family residence. Some investors pay too much for propertiesthinking they have to get into a fast-growing market right away, then count on appreciating home values to make up the difference. While this may work over the long term, it makes it more difficult to generate a profit and a positive cash flow. Be patient and selective. Look for motivated sellers and distressed properties that need fixing up. Finding the right property requires doing your homework and understanding your potential for return on your investment.
Understand your market.
If you’re considering buying a property, become an expert on the market you’re investing in. Learn everything you can about the community, including movement in average home values and rental rates, new developments in the area that may affect property values, unemployment rates for the city and even the crime rates in the area and how they compare to other parts of town. Understanding your market also helps you prevent spending too much on fixing a property up so you don’t go overboard with expensive flooring, countertops, fixtures and other expenses that you won’t recapture in the market you’re in. Staying informed on what’s happening in your area can help you recognize patterns and trends that can affect your success – and make you a smarter investor.
Expect the unexpected.
As 2020 demonstrated, no matter how well you plan, unforeseen twists can come out of nowhere and turn everything upside down. For example, few real estate investors could have predicted the construction material shortages (and subsequent increased costs and delays) that happened in 2020 as a result of the COVID-19 pandemic. One takeaway from this experience: when planning your next property investment and rehab, expect to go over on both budget and your schedule. Be prepared with both some cash set aside and a contingency line item in your scope of work for unplanned expenses that are realistic for any home rehab, such as a seemingly minor repair that turns into something bigger(and more expensive). Surprises can happen during the rehab process, during municipal inspections and even when tenants move in, so have resources available to deal with whatever might come your way.
Build your team.
Real estate investing is not an individual sport. For example, if you’re starting out, you may plan to manage your rental properties yourself. As your portfolio grows, it makes sense to bring in a property manager. Successful investors assemble a team of experienced professionals, including property managers, tax advisors, contractors, real estate agents, attorneys and trusted lending partners. All of the players on your team should contribute not only to your success, but to your knowledge of the process, providing advice and guidance as you grow your portfolio. Invest time in building the team that will help you take your investing to the next level. If you’re not sure where to start, ask for recommendations from trusted advisors or other successful investors.
Stay the course.
As current events unfold, including new elected officials taking office, it’s easy to get distracted and hard to know what might affect your portfolio. Stay alert and informed on factors influencing the real estate market in your area, but don’t let uncertainty cause you to overlook the opportunities that are out there for those willing to work to make them happen.