COVID-19 is disrupting economies across the world. There is no doubt our financial and global markets will be affected, and a recession is one of the things to expect. Most investors are worried and are trying to avoid making any costly mistakes. So is this a good time to invest in real estate with all the current crisis in mind?
Real estate investors’ greatest concern is that real estate prices may drop as it happened during the 2008 recession. What most of them don’t understand is that the lowering of prices was not due to the recession, but as a result of housing collapse. Real estate has been performing well during the past recessions.
How Does a Recession Affect Real Estate Investment?
During a recession, home values and mortgage rates decline while the demand for rentals increases with less competition from other investors. As an investor, buying during this period to take advantage of the low prices and rates could be one of the wisest decisions you’ll ever make.
Some of your properties may lose some value, but eventually, you get the money back once the economy recovers. Regardless of the economic status, this is one of the best long-term investments you’ll ever try.
If you know how to play the game and apply the right strategies, investing in real estate during a recession can be beneficial. When the stock market is doing poorly, some investors find real estate to be among the best investment solutions.
Reasons for Investing in Real Estate During a Recession
The Prices are Lower
During a recession, home values deteriorate. When you’re looking for a home, you’ll find many homeowners willing to lower the asking prices or make a short sale to settle their mortgage. You’ll also find banks that are selling foreclosed properties.
However, taking advantage of these situations allows you to purchase multiple properties that can increase your income in the future.
Real Estate is Less Sensitive to Volatility
It’s clear from the past recessions that real estate has not been adversely affected. Compared to stocks, real estate is a more reliable option during an economic crisis. It moves down slower than other investment categories such as cryptocurrency.
In addition to reducing home prices, the recession also leads to lower mortgage rates. The federal government does this to make it cheaper to borrow mortgages to boost home sales.
Factors to Consider When Venturing Into Real Estate During a Recession
Mortgage lenders want to be sure that you won’t default on your mortgage before approving your application. If you lack good credit, lenders will decline to give you a mortgage loan or approve it at a higher rate. Besides, banks and other lenders want to lend to people who they think will make continuous and timely payments for the length of the loan period.
Having good credit increases your approval chances for rental and mortgage applications. If you are planning to buy a home and have good credit, you’ll probably get favorable interest rates on your mortgage. With good credit, you’ll have a broader range of options.
Having a 20% Down Payment vs. PMI (Private Mortgage Insurance)
When purchasing a house, the lender will require you to pay a down payment of 20% of the total buying price before approving your mortgage loan. While the 20% rule is one of the biggest obstacles to most homeowners, it increases your chances of securing a mortgage loan. It also helps you to pay lower mortgage rates and avoid private mortgage insurance.
Private Mortgage Insurance (PMI) is a form of insurance conventional mortgage homebuyers are required to pay if they can’t afford the 20% of the home’s purchase value. The insurance only protects the lender in case the homebuyer fails to settle the loan.
PMI costs range between 0.5 to 1% of the mortgage per year, and it is paid together with the monthly payment. You can request to remove the PMI once you’ve paid down enough principal. Although it seems like an easy way to buy a home without having to raise a 20% down payment, PMI ends up being more costly. If it’s not the only option remaining, you can avoid it by using a piggyback mortgage.
Set a Realistic Budget
During these hard times, investing in real estate requires you to be honest about your finances. It is not about how low the prices can be but about how much property you can afford before the prices shoot back to normal or even higher.
It is essential to have the right strategies to ensure your business will keep running in the current economy. Understand how stable your finances are and set out a budget that you can comfortably raise without negatively affecting your investment.
Have a Good Realtor
As a beginner, getting into real estate investment alone is not the best idea. A competent realtor understands the market, interprets legal documents, and helps you to get the best deal in the market. During this COVID-19 pandemic, investors are looking out for the lowest prices in the market. However, it is essential to have a realtor with strong negotiation skills to represent you fairly as the buyer and help you find properties that meet your needs and budget.
Inspection of the Property
Now that you’ve identified a seller and several homes to invest in, it is vital to do a thorough inspection to avoid future problems. You don’t want to invest in properties that will require you to incur costly repair and maintenance for you to make any profit. Also, do a title search to ensure no liens placed against the property.
Consider Investing in Airbnb
Investing in Airbnb rentals can be an excellent way to improve your passive income during a recession. It is more profitable than renting the same house to a long-term tenant. When you’re patient and willing to search for renters, investing in Airbnb can be profitable. It is vital to do your research to understand how Airbnb works and how you can enhance your investment.
Single Family Home vs. Condo Investing
As the Coronavirus is spreading and the economy is deteriorating, real estate investors are wondering whether to invest in single-family or condo homes. Let’s expound each of them to help you make the right choice.
This is a multi-family housing unit commonly known as a condominium. These are detached houses constructed in a large residential area but share common grounds such as gym and pool. It is the best option for investors starting in real estate as it is inexpensive compared to single-family homes.
Apart from their affordability factor, condos are easier to manage and maintain. You only need to pay some fees to community service providers to do the maintenance of common areas. Additionally, you can count on constant rental income from condos as there is a higher demand for them than in single-family homes.
Single Family Homes
These homes have a private yard and are wholly detached from other real estate homes. They do not share common areas nor do they require community maintenance. Most investors prefer single-family homes because they can manage and maintain the property in whatever way they desire.
However, as people try to maintain the social distance to curb COVID-19, investing in single-family homes will be ideal. Most people want to maintain privacy while minimizing direct contact with others.
The Bottom Line
Investing in real estate in a recession can be challenging. Remember to be patient, smart, and kind. Understand the long-term nature of the investment and be prepared for any risk that may come up in the future. With the current pandemic, it’s vital to be alert and bold enough to make the best out of difficult times.