Two Years of Covid Changed Everything - Including Real Estate.
Before Covid, real estate was one of the best investments for building wealth. Tax advantages. Monthly cash flow. House flipping for large profits. Solid growth. Commercial buildings. Apartment buildings and more.
Then the CDC reported the first US Covid case just over two years ago, confirming a case in Washington State from a blood sample drawn on January 18, 2020. Remember the panic and the fear of the unknown.
The first year was brutal for families and many businesses. The restaurant industry came to a standstill for a while, and people were afraid to go out, even to get groceries. Malls were eerily empty, and office buildings had only a few brave souls as more and more people worked from home.
But over the past two years, some businesses made fortunes while others still struggle. Delivery services like DoorDash and Grub Hub exploded with new customers, as did Amazon and Netflix. But many retail shops and restaurants went out of business.
So what happened to real estate as an investment? Was Covid good or bad for real estate?
The answer is – Both.
How Covid Affects the Real Estate Market
Housing Market Explodes. The housing market is at an all-time high with no slowing down in sight. When Covid hit, housing construction halted for months. With fewer houses, the prices started rising.
People Exodus from Lock-Down Cities. As many people left larger cities, residential prices jumped by 40%-50%. For example, families fleeing the pandemic-shut-down cities of the Northeast bought Florida houses sight unseen for 30%-50% over the prices just a year earlier. Florida was open for business, and New York was not. People migrated, and prices reflected the shift.
Retail Stores Suffer Even More. Before the pandemic, most malls and retail stores were in trouble from Amazon and online competition. When Covid hit, no one went shopping, and commercial retail real estate values headed for the basement.
Office Space Will Be the Same. Nearly half of all workers worked from home during the pandemic. And a majority of remote workers say they will look elsewhere if their employer insists they come back to the office full time. The commercial office spent rentals will never be the same again. Great if you are a tenant. Not so great if you are a landlord owner.
Great Real Estate Opportunities are Created. As the pandemic changed how we shop, how and where we work.
Real Estate Make Millionaires - Lots of Them
Millionaires and billionaires buy real estate.
Billionaire Andrew Carnegie said that 90% of millionaires built their wealth with real estate.
Even before the pandemic, many wealthy people invested in real estate because of tax advantages and wealth preservation. Stocks may go up and down, crypto may be worth millions today and zero tomorrow, NFTs could lose 90% of their value overnight – but real estate is a tangible asset that has increased in value for hundreds of years.
And real estate is is a necessity of life. People have to live somewhere. Many businesses must have a physical location, like nail salons, car repair shops, doctors’ offices. and more.
You Need Knowledge - Not Wealth - to Buy Real Estate
Leverage and knowledge help you buy real estate. It is common to purchase real estate by putting down 20%, 10%, or even 5% of the purchase price and financing the balance. The trick is to make sure that your rents cover your mortgage payments.
But it is not uncommon to put down less than 5%, or even 0%, on certain types of investments that you buy directly from the owner. You can take over a troubled duplex, triplex, or small apartment building and use your knowledge and sweat equity instead of cash. You might think this is not possible, but it happens every day.
In real estate investing, knowledge is more important than capital.
There are many ways to make money in real estate, like flipping properties or assigning contracts.
But the real goal in real estate is to buy a property that will go up in value over the years and have it pay for itself and give you cash flow and tax advantages along the way.
Covid has not changed any of that- but it did change WHICH properties you should buy.
What to Buy - Cash Flow and Appreciation
Retail Store Space – No. Stay away from retail store space. Unless you are buying malls or strip centers for massive discounts, Amazon, Walmart, and Covid have made investing in retail store space not attractive.
Commercial Office Space – Probably Not. And since no one wants to work out of the office anymore, the risk of buying office buildings is very high. There are exceptions, of course, but why fight the odds?
Residential Houses – If the math is right. Buying residential houses is a study in marketing and math. You have to know the area and the competitive rents. Then you only buy the property if the rents will pay for the mortgage you used to buy the house.
Apartment Buildings. Yes. The sad truth is that the average salary CANNOT afford the average house in most areas of the country. These hard-working people have to live somewhere and they cannot afford a house. So they live in apartments.
And Covid has driven the price of houses well out of the reach of millions more Americans – and they will all be living in apartments, mobile homes, or RVs.
Storage Centers. Regionally, yes. Storage centers are cash machines. There are easy to understand and easy to operate. Storage centers were already popular before the pandemic. But the pandemic is forcing families from a five-bedroom house to a three-bedroom apartment – and there is too much stuff for the apartment. So the family rents a 5-foot x 7-foot unit at your storage center for $100 per month. Fortunes are being made in this business right now. The main risk is future competition. So if you know your market and the number make sense, this may be a good choice,
RV Parks and Mobil Home Parks. Yes if you can find them. These investments are usually done with a group of investors (or friends) and can throw off some serious cash flow, depreciation, and increase quickly in equity.
-RVs. Because of the pandemic, more and more people are RVing full time. (RV sales are at an all-time high). These nomads have to have someplace to stay as they wander, and they are happy to find a will run and well-maintained park. These are usually financially stable, easy-going folks who easily afford your rent. Class A motorcoaches can cost from $40,000 used to well over $250,000.
-Mobile Homes. But many families don’t like or don’t want an apartment or travel in an RV, and they often opt for a Mobile Home Park. Mobile home parks are prized investments for serious cash flow and appreciation.
Why Invest in Real Estate
- Cash Flow. A good real estate investment will produce monthly cash flow. If you do your homework and math correctly, house rents, apartment rents, RV park rents, storage space rents- they all add up quickly and can have you cash positive from day one.
- Appreciation. While there are no guarantees in life – if you buy your real estate for the right price, it will appreciate. And you do NOT have to wait until you sell to be able to enjoy some of the appreciation, as you will see below.
- Security. Real estate is not Bitcoin, stocks, options, or NFTs. It is a tangible asset. You can drive by and see it. You can touch it. It is not going anywhere. And it is never going to zero overnight, like some intangible assets might.
- Leverage and Flexibility. Leverage in real estate is common. You can often purchase a million-dollar property with less than 10% down. And that 10%may be a note or in interest in another property. Many no-cash-down real estate purchases are made all the time.
- The Ultimate Inflation Hedge. If inflation goes up, so do the rents.
- Tax Advantages. The many tax advantages available set real estate apart from any other investment. You can deduct many expenses, including property taxes, mortgage interest, management fees, insurance, maintenance, repairs, advertising, marketing, and more. You can take advantage of depreciation and long-term capital gains tax advantages.
- Access the Equity Tax-Free. If you buy a $1,000,000 property with $1,000,000 worth of financing – you may have cash flow but no equity yet.
But what happens when the property is worth $3,000,000. If you borrow $500,000 against the property, you will have $500,000 in your pocket, $1,500,000 in mortgages, and equity of $1,500,000.
If your raised rents support the debt obligation, you will still be cash positive. But the real beauty of this is – you received $500,000 today and pay no taxes on it until the property sells. You are not taxed on borrowed money. Millionaires use this strategy to finance even more real estate purchases or simply enjoy some earned equity.
- The 1031 Exchange. The 1031 Exchange is the ultimate kick-the-tax-obligation-down- the-road strategy. If you buy an apartment building and sell it in two years for a $1,000,000 profit, you are obligated to pay long-term capital gains on that amount. Assume you paid $200,000 in taxes. Now you have $800,000 to invest.
But under the 1031 exchange rules, the IRS allows you to defer paying taxes if you are reinvesting the proceeds into another “like-kind” investment within 180 days and flow the other 1031 rules. You do experience a taxable gain, but the IRS does not “recognize it until you sell the new property.
However, if you sell the new property under another 1031 Exchange, your taxes are deferred again, and again. Many LLCs use 1031 Exchanges for their investment properties. You must follow some definite rules, so be sure and get some qualified expert help.
Interested In Real Estate - Let Us Help
Investing in real estate can certainly be part of your financial planning for current cash flow, future appreciation, and many tax advantages.
At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations.
And this includes helping you build your real estate portfolio.
Whether you are trying to build an extensive investment portfolio or just buy a duplex to pay for your child’s college tuition in ten years, we can help.
We keep up with the laws, rules, and ever-changing tax code, so you don’t have to.
We can guide you through the potential cash flow, depreciation, amortization, and equity analysis as you pick your potential investments. So you can choose the investments that are right for you and your family’s future.
Call today and let us show you your next best steps for growing your real estate portfolio today.
“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”