It’s no secret that 2020 was a difficult year for many industries. The Covid-19 pandemic all but destroyed industries such as travel, hospitality, sports and entertainment. The stock market was at an all-time high, came crashing down and then built its way back up.
In the midst of all the economic turmoil came instability in housing. Millions of families struggled to home-school their kids, work remotely (if that was even an option for them), and put food on the table. Even worse, many families lost their income and are still struggling to get back on their feet.
This resulted in land lords struggling to collect rent payments, which in turn, affected their income, as well. The whole thing has been a vicious cycle, but medical experts are hopeful that we are over the hump.
In the wake of such instability, many investors are left wondering what to do next. There are two or three basic strategies that seem to be emerging and savvy investors need to know which one to employ.
There seems to be a crowd rushing towards bitcoin, cryptocurrency and other high-risk stocks. Although there is certainly a ton of money to be made in the stock market, there’s also a risk of losing it all. Experts are referring to both bitcoin and the stock market in general as huge bubbles right now.
The stock market rollercoaster of 2020 saw an epic crash in March, but also a surprising and historic recovery. Tech stocks like Amazon, Netflix, Facebook and Google were collectively up by double digits. In fact, by the end of November, Amazon was up 70% for the year!
Many experts are predicting that tech and other volatile stocks will become stagnant or even come crashing down as the world slowly returns to normal. I have my doubts about that, but it’s worth noting that investing in high risk stocks in a time of such uncertainty in the world is risky business. Some investors have the tolerance and the money to do so, but others are less confident, or at minimum, more conservative.
Those who don’t have the stomach to chase high-risk investments or try to time the market are choosing to do nothing. These are the investors who may have done fairly well in the past, but were burned by the 2020 situation. Maybe they panicked and pulled their money out of the market in March and missed out on the 60% recovery.
Needless to say it’s impossible and almost foolish to try to time the market just right. This has never been a great strategy for the majority of investors. That’s why financial managers typically encourage their clients to keep a low-risk, diversified portfolio and to keep it going over time.
In a year that will hopefully bring new beginnings, I’m not sure that sitting on my hands is the right move. This strategy is a no-win situation regardless of your investing experience. You can’t win if you don’t play and the sideliners stand a lot to lose if they spend another year watching from the wings while the rest of the world invests.
In case you’re unclear on the difference between tangible and intangible assets, let’s talk about the key differences first. Every smart investor should be well versed in the assets available and what the benefits are of each. Depending on market conditions and the overall economy, different types of assets are better choices for different people and different times.
Some tangible assets are much more volatile than others. For example, investing in art or antiques could prove to be incredibly profitable. On the other hand, you could also get stuck with them for a long time. Experts in this field typically advise investors to be smart with their choices. You should love whatever it is that you’re investing in, just in case you are unable to resell it later on.
Real estate is a more secure tangible asset, assuming you purchase in a good area for a good price. Real estate can still be volatile with property values rising and falling, but it’s a generally stable investment to make. You can feel good about investing in real estate as opposed to material items that may or may not produce a profit over time.
As you might’ve guessed, intangible assets are the opposite of tangible ones. These are things that you can’t physically see or touch, but they have value and could potentially produce income. Some examples of intangible assets are:
Although these can also be great investments, it’s rare that private investors would focus on them. If you’re trying to build an investment portfolio that will produce a passive monthly income, real estate is safe and it will get you there much faster in most cases.
In an uncertain market where pharmaceutical companies might rise and tech companies might crash, it’s smart to consider the third strategy, which is to invest in tangible assets. It’s highly likely that the real estate market will continue to see some churn. As an investor, you need to know where to buy and where to sell.
As the world continues to recover from the pandemic and people search for their new normal, it goes without saying that there will be some big changes. The real estate market has seen major changes in buying and selling patterns over the past twelve months. Here are some of the things impacting real estate and some ways you can make them work for you.
The Covid-19 pandemic has spurred a wave of migration from cities in California, New York and other high-cost areas. People are instead opting for locations with a lower cost of living and more favorable tax laws. As a result, properties in some areas of the country are becoming easier to buy or sell.
Additionally, many families may have been forced to foreclose on their homes and may therefore be looking for rentals. This could be the perfect time to capitalize on your investment property income, as well. Regardless of your current investing portfolio, there are two basic strategies in this category that will be affected by the mass migration throughout the country.
Buy and Hold
This could stand to impact your investing decisions in a few different ways. One school of thought is to employ the buy and hold strategy. Continue purchasing investment properties as you normally would, use an aggressive pay down strategy, and rent them out to cover the mortgage.
This has always been a smart strategy for building wealth over time. If you have the money to invest and the time to accrue wealth over the following years, this is a great option. Housing will always be a need. You just need to find the investments that make the most sense for you.
Buy and Flip
On the other hand, if you’re handy with power tools, or have access to someone who is, you could also benefit from this strategy. Buying a house, doing some repairs or renovations and selling it off is a great way to make some quick cash that you can then use to put down on the next property. However, you have to buy low and sell high for this to work.
In states where there is a mass migration of people into the area, selling these homes shouldn’t be an issue. The more likely obstacle you will encounter is the ability to buy low. Since so many people are moving into Florida and other low-cost Southern states, it can be hard to find homes for good prices right now. It is definitely a seller’s market.
Low Interest Rates
While we’re on the subject of buying and selling, let’s talk about interest rates. They are at all-time lows right now and it appears that they will stay that way for a while. This means borrowing costs should remain low, allowing consumers and investors to purchase properties more easily.
When borrowing costs are low, many investors employ the concept of leverage, in which they expand their debt in order to increase their potential for higher returns. This strategy can be a smart one to employ if you have the financial status to do so. Here’s a simple example of how it works:
Let’s say you own a $250,000 home and you want to use a home equity line of credit (HELOC) to purchase an investment property. A HELOC will allow you to borrow up to 80% of the home’s value, minus the amount that you still owe on the mortgage. So on this home, you can borrow $200,000. If you owe $100,000 on the mortgage, that leaves $100,000 for you to purchase an investment property.
Taking that money to purchase an investment property when rates are low and things are good is a smart investing strategy. Yes, you are borrowing against your home and it can be risky, but it can also be really profitable. Only you can decide what your level of risk tolerance is.
It goes without saying that any transition in power at the top of our ranks is going to have an impact on the housing market. From tax rates to interest rates, everything has the chance of being altered in one way or another. Since each presidential cabinet has different views on what’s best for the country, this will impact investors in various ways.
So far, polls have shown that both buyers and sellers are becoming more and more uncertain about the real estate market. History shows that uncertainty in the market can make it harder to sell a home. If your strategy is buy and hold, this could work out perfectly for you.
Studies also show that millennials are becoming more and more confident in buying homes. Given that they are the largest generation to date and they are of family-rearing and home-buying age, investors could flip houses fairly easily and make quick cash with each transaction. The key, as previously mentioned, is to buy low and sell high. If they are snatching up homes left and right, there’s no reason to buy and sell unless you just want the passive income vs the quick cash.
We also need to address the elephant in the room, which is quarantine boredom. 2020 saw an historic amount of job loss, turmoil and basically solitary confinement for millions of Americans. During that time, it’s not surprising that the tech stocks rose to crazy-high levels. What else were Americans supposed to do with their time?
Now that we are mostly out of the weeds, experts are predicting a slow but full recovery of the economy. As the Covid 19 vaccine continues to roll out and be circulated to the masses, businesses will start to reopen and new ones will emerge. People who were quarantined for months on end will hopefully have the opportunity to get back to work and back out into the real world.
As a result, there could be a rise in home purchases from people who might’ve had plans to do so prior to the pandemic, but were unable to follow through for one reason or another.
Regardless of what type of investor you are, there is no sense in spending an entire year doing nothing. In fact, choosing to do nothing with your investments is a conscious decision to become stagnant for a period of time. I don’t know about you, but that’s definitely not my goal.
Instead, consider looking at the various investment properties available in your area. Consider whether the buy and hold strategy will work for you, or if you would prefer to flip properties. Both can be a brilliant strategy if you play your cards right.
Charles Carillo is the founder and managing partner of Harborside Partners. He has invested in over $25 million worth of real estate, in several states, and has extensive knowledge in renovating and repositioning multifamily and commercial real estate. Charles holds a BS from the Connecticut State University.