The Benefits and Drawbacks of Investing In Residential Real Estate During a Pandemic
Investing in residential real estate has historically been considered as a safe investment thanks to the steady returns it can offer through renting, or through the significant profits available when you increase the value of a house to sell it on. Yet, during a pandemic, things become slightly more uncertain. Let’s have a look at some of the benefits and drawbacks of investing in residential real estate during a pandemic, to help you decide if it’s the right investment for you.
Good To Have Assets in a Poor Economy
Investing your money in riskier areas such as stocks may increase your potential return on investment, but it also increases the potential for you to lose everything. That’s why investing in a tangible asset, like property, is your best option. Purchase the property when the market isn’t performing well, spend time and money improving it and then decide the best course of action.
If the market is still doing badly when you are wanting to sell, hold onto it and wait for the perfect time to sell. Alternatively, you could rent it out for a consistent, long-term means of profiting. Once you have your asset, you can be patient and assess the best thing to do next, whereas with other investments, this may be out of your control.
Potential For Property Purchase Below Market Price
As a buyer, you are currently in a strong position. Many people who are selling their homes may unfortunately be experiencing financial issues and are likely to want to sell the property as quickly as possible. Due to this, you may be able to get a fantastic deal on a property, especially when using online property auctions.
Online residential property auctions have become extremely popular since March, as they offer the buyer the opportunity to get a property for below market price from the comfort of their own home. They also provide the seller with the opportunity to sell their property quickly, making it beneficial for both parties. Many people wouldn’t feel confident attending an auction, but the online version enables people to view the property they are interested in and make competitive bids. If you spend less on the property to begin with, your returns will be greater.
Advisable to Have Multiple Streams of Income
When the economy is in a weak position, all areas of life can be unpredictable. You may feel secure in your job role, however things can unfortunately change at any moment. So, if you are in a position to invest in property and provide an additional stream of income in the form of rent, this is definitely advisable. Something safe and predictable like real estate is the best way to create a secondary income.
Rental Housing is in Demand
Buying your first home takes years of saving for most people and is an extremely substantial investment, so during times of financial uncertainty, this is not something people will be in a rush to do. Therefore, rental housing is currently in high demand. If you are lucky enough to have not been impacted financially by the pandemic and can afford to buy a property to rent, the potential returns will be fantastic.
Limited Mortgage Offers
If you’re a cash buyer, then you will be in a strong position. However, if you are relying on a mortgage in order to make this investment, you might struggle. Banks are making it increasingly difficult to get a mortgage, asking for at least a 15% deposit, lowering the borrowing allowance and offering extremely high interest rates.
A few years ago, 5% or 10% deposits were quite common, however they have now completely disappeared from the market. To summarise, unless you have a substantial amount of money to invest upfront, purchasing a house as an investment might not be possible in this current climate.
Significant Investment During Uncertain Financial Time
Whilst you may have enough money saved for a house deposit, or enough to cover your predicted renovation costs, you must consider the long term financial commitment that comes with an investment of this nature.
If you are looking to renovate the property and then sell, you must always expect there to be issues that will cost a lot of money. Even if your budget covers the worst-case-scenario cost of each element of the renovation, there will be something unexpected that crops up 99% of the time. Say you have predicted that the renovation will cost £55,000, always aim to have at least 20% saved on top of that, so £66,000. It is so much better to spend slightly more time saving so that financial issues don’t get in the way of the project, rather than having to abandon the project all together as you can’t afford to rectify major problems.
This is even more important if you are wanting to rent out the property. As landlord, you will be responsible for the maintenance of the property, so you’d need to have savings in place to contribute to fixing boilers, paying electricians, repairing roofing, etc. This is absolutely essential, so you need to consider whether you are in a position for a long term financial investment like this, especially considering the economic instability caused by the pandemic.
Risk of Rent Arrears
As discussed previously, many people have struggled financially as a result of Covid-19. So, as a landlord, you may face difficulties when it comes to tenants being unable to keep up with rental payments. This is always a concern anyway when it comes to residential real estate, however the risk is increased during these difficult times.
You need to be prepared for rent arrears (rent that is not paid), as it can often result in having to involve bailiffs and pay quite substantial fees for their services. The average cost in the UK to evict a tenant is between £1,300 and £2,200, depending on how quickly you would like the eviction to happen. When this occurs, often the property can suffer damage, so the risk of this must also be taken into account. Of course this won’t always be the case, however it is quite a real possibility that should be considered.
Overall, residential real estate is still a good investment to be making, as long as you are in a strong financial position with plenty of savings to rectify any potential issues. Have the property surveyed before purchase so you can accurately predict how much you will need to invest in the first few years. This is one of the most important things you can do to avoid any unexpected costs during the renovation or after tenants have moved in. Fixing issues at the beginning is the easiest way to go! Compared to other markets, residential real estate is definitely one of the safer investments to make.