Value or location? That’s just one question investors ask themselves before investing in the real estate market.
Demographic data, real estate trends and personal criteria are all important factors, but the most important thing is location.
First, you need to determine the type(s) of rental property you want to add to your portfolio. There is a range of property sizes and different sets of characteristics to choose from.
Next, have a defined budget. Property valuations change depending on location, size and features, so knowing your budget will help you know where to start your search for your desired investment property. There are going to be a variety of costs, too, including closing costs, operating costs and property taxes, among many others. Your goal is to make a profit, so consider overall costs and recurring expenses that align with your budget to preclude you from taking a loss.
What are your real estate investment goals and how long will it take to achieve them? These are more questions real estate investors should keep in mind before getting ahead of themselves.
The aforementioned factors are essential to help shape your real estate investing plan, which will serve as a guide for when you probe investment opportunities in different locations. Here’s what you need to know about which places offer the best real estate investment properties in 2021:
- Residential properties.
- Industrial properties.
- Commercial/retail properties.
- Vacant land.
As people continue to work from home, they may find that they need more space as they continue to move out of cities and into the suburbs. With much of the workforce reducing their commute or eliminating it completely, the amenities of a city center may not be a sticking point for renters, making a suburban setting more appealing.
The ongoing pandemic has people looking for more outdoor space and home offices, says Moira Taylor, co-owner and CEO of Taylor Made Realty in Atlanta. “Investors should consider the suburbs of major metropolitan areas, as they’re an ideal investment and have seen an increase in buyer demand in places like Atlanta, New Jersey, San Francisco and other major city suburbs,” she says.
Taking note of these trends, real estate investors may turn to the suburbs for residential rental opportunities. An important question investors should ask themselves is: “Can I earn enough in rent to cover costs?” says Bill Walker, the chief operating officer for Kukun, a real estate data company based in Menlo Park, California.
“I like to do a complete analysis of all of the different costs that I expect to have from renting out the property with a good idea of what I’m going to earn in rental income,” Walker says.
If you have about 20% more in a monthly payment coming from rental income, you have a nice profit cushion, he says.
Places where you tend to find these opportunities are in the Midwest markets like Cleveland, Cincinnati, Kansas City or Dallas, Walker says.
Vacation rental properties are also residential investment properties to consider as a way to diversify your investment portfolio. A common risk associated with vacation rentals is the property doesn’t offer consistent year-round rental business. But Walker says that investors who choose a “four seasons of opportunity” property, where tenants can stay all year, could be an attractive investment that offers upside in both good and bad economic times.
He cites areas like the Pocono Mountains in northeastern Pennsylvania, Lake Tahoe in Nevada and California, the Outer Banks in North Carolina, Big Bear in California and the Eastern Shore in Maryland.
Regarding vacation rentals, Walker says, “Demand seems pretty stable in great economic environments and poor economic environments.” Even during the Great Recession when it would be challenging to sell properties, he says vacation rentals were staying afloat because people still wanted to take vacations enabling investors to keep their business going.
“During COVID-19 times, we’re finding that if it’s within driving distance of major cities or metro areas, people want a change of scenery in a place where they can go out even if it’s not in a way we think of traditionally,” Walker says.
Airbnb – the online vacation rental company making its initial public offering debut on Dec. 10 under the ticker ABNB – has been deeply impacted by the pandemic, but its business was able to quickly bounce back a couple months later. According to the company’s prospectus summary, as millions started to take domestic travel with the ability to work from home, guests ended up taking longer Airbnb stays. The need to travel even locally can be viewed as a resilient aspect of the vacation market and Airbnb’s business model.
Industrial rentals, which generally consist of large-scale properties used for storage, warehousing, manufacturing or distribution may be a thriving investment in the new year. The e-commerce boom that took effect this year, caused by people spending considerable time in their homes, is lining up to continue in 2021. This trend requires companies to house their products in real estate that facilitates easy distribution.
Industrial real estate has certain property characteristics. Eric Maribojoc, director of the Center for Real Estate Entrepreneurship at George Mason’s School of Business, says, “These facilities will need to be close to population centers with easy access to major highways. They will need to be in neighborhoods that can tolerate a lot of truck traffic and with a workforce available for warehouse and fulfillment operations.”
Griffin Industrial Realty (GRIF) is an industrial real estate company that develops, owns and manages industrial facilities. GRIF properties tend to be located near major highways and densely populated markets. The company has its very own construction team, so they are experienced in the development and management of industrial projects.
Given the complexity of managing this type of real estate asset class, investors may be more comfortable investing in an industrial stock such as Public Storage (PSA), the world’s largest self-storage company, based in Glendale, California. PSA continues to develop more facilities and expand locations. As of Sept. 30, the company has opened new projects in Florida, Missouri, Minnesota and California, with the development of more facilities to come.
But Art Scutaro, executive vice president of project management at National Realty Investment Advisors in Secaucus, New Jersey, says, “When commercial real estate drops in value in major cities, that creates opportunity.”
He says now is the time to buy.
“I think major cities buying up real estate now will get a great deal in any major city,” he says.
But Scutaro points to the problem of not having cash flow from tenants to sustain the mortgage. This means that investors will need to be able to cover expenses until the market recovers.
If you’re holding cash, then you’re in a great position to buy up any type of commercial real estate in major cities, Scutaro says, including hotels, offices or retail spaces because you can negotiate the price down lower as people are desperate to sell.
Investing in vacant land may be better suited for a more seasoned investor or real estate company that’s experienced with handling issues like permits, zoning restrictions and financing these types of projects. Industry professionals who have experience can easily deal with what may seem a major challenge to an individual investor. In this case, investing in a homebuilder or a real estate investment trust may be a better option as investors will gain exposure to the investment without the hassles associated with building large-scale properties.
Taylor says areas where the climate is warmer year-round are good investments when looking for vacant land opportunities.
“States like Florida have seen a surge of buyers since the onset of the pandemic which will continue to drive property values up as well as land value,” Taylor explains. “With families having to be home more, outdoor spaces are increasingly important and especially having access to them all year long in a warmer climate.”
For a balanced real estate investment, investors can consider Toll Brothers (TOL), a leading national builder of luxury homes in the real estate market. TOL has years of experience in the construction and management of new homes and rental communities. The company has mastered the home construction process and has built a solid reputation throughout its years in the business.
The pandemic put a dent in the construction business – with TOL’s home sale revenues down 2% in the first quarter, down 11% in the second quarter and down 7% in the third quarter, but TOL has the wherewithal to meet the challenges ahead. The latest quarter marked the highest third-quarter contracts in TOL’s history, according to a company report. TOL is a trusted and well-capitalized home builder, with a market cap of $6.2 billion. TOL stock is up about 20% year to date, with the current stock price around $45.
Real estate investing can be a rewarding long-term investment. Despite challenging market conditions, there are real estate investment opportunities in either residential single-family rental properties, multifamily commercial properties, industrial real estate as well as vacant land that you can consider in 2021.