COVID-19 has changed the world as we know it. Everything from where we live and work to how we enjoy and spend our time and interact with each other has changed dramatically in the face of the challenges of the ongoing pandemic.
With such massive changes in our society, it is understandable that investment strategies are also changing. Two years into the pandemic, here’s how I changed my real estate investing strategy.
Durable Assets Rule
Before the pandemic, I mainly invested in mortgage notes. This meant that I purchased an existing mortgage created by an individual or a lending institution such as a bank, putting myself in the bank’s shoes and collecting the monthly mortgage payment from the borrower. In a normal market, this niche real estate investing method can be a great way to generate passive income and earn above-average returns. But in today’s inflationary environment, getting a high enough return can be difficult.
If inflation is 8% and the interest rate on the mortgage is 5% for 30 years, I’m losing money by withholding the loan. Since most residential mortgages are fixed, there is no way for me to fight the rising rate of inflation. For this reason, I avoided investing in mortgage notes – which includes mortgage real estate investment trusts (mREITs) – and instead leaned towards durable assets that can fight inflation.
Durable assets like real estate adjust to inflation. Values are not fixed, which means that when the cost of things goes up, the cost of real estate goes up with it. Properties that are rented out on a short-term basis, such as single-family rentals, multi-family properties, mobile homes, or self-storage facilities, also have the advantage of being able to fight rising inflation at a much faster pace. faster than other commercial property types. properties, which can have lease terms of 5 to 30 years.
Long-term trends with defined futures
I also invest in real estate sectors supported by long-term trends that can clearly survive the short-term impacts of the pandemic. Industrial real estate, multi-family housing, single-family rental properties, self-storage, data centers and communications infrastructure are all sectors that have performed extremely well during the pandemic and have many drivers suggesting that they will continue to do well long after the pandemic is gone.
I am wary of most asset classes that are still in a phase of uncertainty about their future. Sectors like retail, hospitality and offices still have a long way to go before the recovery. These are also industries that are likely to suffer further negative impacts in the event of a recession as consumer spending slows. While I don’t think these industries are doomed, I do think they have even more trouble ahead of them, and that’s why I’m abstaining for now.
Double down on REITs
Real Estate Investment Trusts (REITs) have become my preferred method of investing in real estate today. Not only are they far more accessible and profitable than trying to compete in today’s hot real estate market, but they allow me access to a wider variety of industries backed by institutional grade properties.
I significantly increased my investment portfolio during the pandemic and continue to do so today despite the market downturn. I am personally looking for rental properties in my local market not only to earn cash, but also to take advantage of the tax benefits and potential appreciation of owning real estate. However, this is certainly a difficult feat in today’s high priced and highly competitive market.
I am patient when it comes to buying a property and make sure not to react to market fears or pressures. The quality of the business and the performance of the property or portfolio guide my purchasing decisions from a long-term perspective. While there are certainly a fair amount of challenges and unknowns as to where the market is headed, there are still plenty of opportunities for investors.