In spite of the coronavirus pandemic, the U.S. real estate market has been growing. The National Association of Realtors (NAR) reports that U.S. home sales reached 6.76 million units in 2021, up 22% from 2019, reaching the highest level of annual growth since 2006. Home prices are also on the rise, up 12.9% from the previous year. This is partly due to low inventory and skyrocketing demand – the total number of homes available for sale has dropped 23% from the previous year.
Investment opportunities have changed accordingly, with fewer distressed properties sold at sensible prices, a fact that has created a new perspective on the two favorite real estate investment strategies: a) buy, rehab, and flip or b) hold and rent. There are more buyers hoping to take advantage of low mortgage rates than sellers putting their homes on the market, creating inflated home prices and a competitive field of players hoping to buy.
With no end to record-high home prices in sight, it is can be difficult to invest in real estate directly by buying property and renting or selling. A significant cash investment is necessary to be competitive, and while owning a home leaves you with a tangible asset, there is no guarantee that the market will sustain the current level of demand.
Those with significant capital might consider investing in communities rather than individual homes. The current demand for inventory makes land purchases and development investments very attractive. While prices show signs of sustaining their current levels, those who invest in building the overall real estate inventory stand to gain significantly. Furthermore, those who invest in mortgage assets and lending institutions could also see long-term advantages as more and more buyers turn to banks to help them remain competitive in the current hot market.
There are other ways to invest in real estate if you are not ready to buy and manage real estate directly. Buying property is usually a long-term commitment unlike buying shares of a stock that can be sold later if you decide you’ve made a mistake. Transaction costs can be high and it’s usually difficult to sell quickly. Active real estate investment gains can be much higher, but they also require time, experience, capital, and personal motivation to succeed.
For those who lack capital or experience, passive investing can be a viable real estate investment strategy. Real Estate Investment Trusts (REITs) are an alternative to direct real estate ownership. REITs allow you more liquidity and require less immediate capital – they can be traded and sold much like stocks. A REIT can also allow you to diversify across property types, locations, and more, and some of them even provide dividends. Choosing a REIT that specializes in multifamily communities and housing developments could be a very wise investment due to current housing demand.
Generally, the question comes down to how much you are able to invest. The current market is a seller’s market, meaning that those who can sell homes and rental units stand to make significant gains. The key is to invest in new homes and developments when possible to take advantage of the current market and the signs that demand will continue to grow for the foreseeable future. If you have a significant sum to invest, the most profitable investment will be in direct real estate ownership of rental properties or developing housing, but those who choose to invest passively can benefit as well if they choose investments that capitalize on the current hot housing market.