Do you want to invest in property? We saw tremendous stock market growth in 2019 with the S&P 500 up 31% follows by another 18% in 2020 in the S&P 500. Most investors made money hand-over-fist, and we were swimming in cash. Just think about all the tech investors in the SF Bay Area after the NASDAQ closed up 44% in 2020!
Despite a strong stock market, the physical real estate market lagged behind. This is why I think there is tremendous opportunity to buy real estate in 2021 and beyond. Affordability is up because mortgage rates are down to ALL-TIME lows.
Check the latest on Credible, a top lending marketplace where lenders compete for your business. I got a 7/1 jumbo ARM for only 2.25% with no fees recently!
Millennials are coming of buying age and inventory is on the decline, making competition for homes quite high. I've talked to over 30 28-35-year-olds who all say they want to buy.
That said, it's always good to be cautious before buying property. Here are some things to be aware of.
Things To Know Before Buying Property in 2021
1) Falling rents. If you want to invest in property it's important to pay attention to rental prices. Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods.
2) The Fed is on your side. Pay attention to interest rates if you want to invest in property. After raising rates multiple times since end of 2015, the Fed has finally reversed course, creating a nice tailwind for homebuyers. Look at the dramatic drop in rates in 2020.
The Fed has promised to keep rates at 0% – 0.25% infinitely. It's happy to wait for the economy to recover from the pandemic and see higher-than-normal 2% inflation.
I recently refinanced my primary mortgage to a 7/1 ARM at only 2.25% with ZERO fees! Check out Credible for some free rate quotes from qualified lenders. I can't believe how cheap mortgage rates have gone down again.
In 2021, I can get a 7/1 jumbo ARM for 2.5% or less with minimal fees. It's nuts! Take a look at the mortgage rate chart below to see for yourself.
3) Property prices are higher than 2006 peak prices. While every city is different, if you look at the prices in Denver and Dallas, you’ll find that the prices are roughly 45% higher than they were in 2006-2007. This price performance is similar to San Francisco’s.
Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks. Make sure you pay attention to fundamentals.
I'm a buyer of San Francisco real estate still due to tremendous job growth and income growth. The NASDAQ is back to its all-time high in 2021 after a scary decline in March 2020.
4) Housing prices will eventually effect tax returns, but not immediately. Limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets.
5) Mortgage-purchase applications close to a 11-year high. There is pent up demand to buy property during the shut down. This could bring about the mother of all bidding wars due to low rates and low supply.
6) Real estate is a laggard to stocks. The housing boom that began in January 1996 ended in March 2006. But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked.
Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2008, people started to panic.
Then, Lehman Brothers went under on September 15, 2008, a full two and a half years after the housing market peaked. And things got even worse, with the S&P 500 finally bottoming out on March 9, 2009.
Below is a great chart that shows how badly housing prices corrected historically in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. We’re now going into the 8th year of a bull market.
In 2020, the situation is a little different because of how quickly the stock market declined in March and then rebounded. There's a window of opportunity to buy real estate from doomers who still think we're heading off a cliff.
The Fed and the government have explicitly said they will support the economy no matter what in 2021+.
Invest In Property In 2021
The mass media and the real estate industry will focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2020 and beyond.
That’s fine if you can surgically buy in strong job cities via real estate crowdfunding. But, don't count on that being the rule.
Look at property nationwide as a whole before you invest in a property. Prices will probably continue to inch up due to a slowing in new home construction.
Look at real estate opportunities in your own city as there will be a migration to lower cost areas of your city with more space and less density. The work from home trend will ensure this as fewer people need to commute downtown anymore.
Dying to buy a primary residence? Ensure that you can withstand a 20%+ correction over a five-year timeframe.
If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn.
Better yet, pay cash.
Real Estate Investing Suggestions
If you're interested in a hands off approach to real estate investing, consider investing in a publicly traded REIT or in real estate crowdfunding. Once I had my son in 2017, I decided to sell my PITA rental house and reinvest $550,000 of the proceeds into real estate crowdfunding. My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.