5 Things About Residential Real Estate You Need to Know Before You Buy in 2021 in Minnesota

As a retirement vehicle, no investment is as secure, brings more benefits¹ and is as financially rewarding² as real estate. Yet, just buying up properties without careful consideration is unwise. While there are many things you need to know about property investments, here are five things you ought to know about residential real estate before you buy in 2021. Naturally, these apply whether you are buying a home in Minnesota in which you’ll reside or one you plan to use as an investment.

1. 2021 — A Year Like No Other

Few dispute that 2020 was a year like no other. One of the biggest events, COVID-19, has resulted in one of the biggest shakeups ever in real estate.³

A key reason 2021 is a year like no other is because of 2020. The global pandemic caused by the coronavirus has altered the way people live and work. 

Just a few years ago, working from home seemed an oddity or a perk reserved for web developers and computer geeks. Thanks to coronavirus, at least 42% of all jobs are performed at home, according to a Stanford University estimate,⁴ and experts expect the trend to continue even when life returns to “normal.” Thus, we can expect people to seek homes for rent with at least one room specifically designated as a home office or dedicated workspace.

In fact, much of the work once done in the inner cities is now being performed in suburban home offices. Demand in the suburbs is likely to increase, while in many cities it will likely decline.⁵ Take this into consideration when you are offered that “sweet deal” downtown. 

Also, expect the availability of vaccines in 2021 to be a key driver of some properties. Why? We answer that next … 

2. Real Estate and Supply and Demand

The law of supply and demand states that when supplies are high and demand is low, prices will be low. And when supplies are low and demand is high, prices will be high. ⁶

Applied to real estate in the COVID world, this means that people will flock to where the vaccines are available. That could drive market prices higher. If you already have property in a “hot” area, rents could soon be at a premium. If not, expect to pay more to purchase the properties. Conversely, areas without the vaccine early on will see declines in property values. 

Another thing to consider are jobs.⁷ Some industries were hit harder by the coronavirus pandemic than others. An S&P Global¹⁵ analysis suggests that the airline industry has been the most negatively impacted, resulting in massive layoffs. Geographical areas where airlines are key employers will likely feel the economic impact of those layoffs.     

Finally, expect people to seek areas with the best high-speed internet, especially if they are working from home. Proximity to an office supply store is a plus.

And a side note on the work-from-home folks: While there are many who are new to this trend because of the pandemic, those who have been doing this for years are among the most stable, reliable, productive renters you will find.⁸ This is in part because moving not only involves their home but their workplace as well. Most prefer to avoid this if possible. Will this attitude continue in the new generation of remote workers,⁹ as they are now called? Hard to say. But for a certainty, working from home will impact the law of supply and demand as it relates to housing, so prepare for it. Of course, despite the pandemic, the resulting widespread unemployment and economic downturn, housing prices rose by 15% in 2020.¹⁰ That’s the bad news. 

3. What is the Good News?

Also thanks in part to coronavirus, investors can enjoy near-all-time-low mortgage rates. In fact, according to Freddie Mac, the rates for 15-year mortgages are the lowest they have been since 1991.¹¹ Not only that but because of the pandemic, experts agree that the rates will likely remain stable and low throughout 2021. How low? Around 3% to 3.25% for a 30-year fixed-rate mortgage.¹²

So, while the prices of properties might continue to rise this year in most markets, these prices are offset by great interest rates. See, there really is a silver lining to that cloud. 

Of course, despite low mortgage rates, some may be inclined to borrow from their retirement funds to pay for new properties. Should you do this? We answer that question next … 

4. Should You Borrow from Yourself to Buy a House?

Borrowing from a 401K plan or similar retirement fund is one way some property investors jumpstart their real estate portfolio. And while doing so is simple and may at times make sense, just be careful to weigh all the pros and cons.

Some of the things to consider include:

• Not all retirement plans are equal. While this goes without saying, know that withdrawals from Roth IRAs and certain others are usually better than taking money out of a 401K.¹³
• Taking money out of a 401K for investing could result in steep penalties come tax time. 
• Many find it better to take out a loan against their 401K rather than withdraw the funds.
• And of course, there is interest on a loan against your retirement plan, so weigh that against the standard mortgage rates.

Naturally, each situation is different, so if you have questions about whether it makes sense to borrow from yourself, get in touch with us at Lundervold Financial. We will be happy to discuss how you might make the most of your options. 

That said, the biggest thing to know is not where you will get your financing, but rather where you are investing. 

5. “Location, Location, Location”

In 1944, real estate mogul Harold Samuel shared the often quoted, “location, location, location” quote¹⁴ when asked about his thoughts on properties and the growth of wealth. But what did he mean and does it apply today?

Well, here we come full circle. We started this article by explaining how the COVID pandemic has changed where and how people live and work. These changes are impacting property values and purchase decisions for many. Yet, even if the pandemic never occurred, something else would disrupt the markets. This is just a fact of investing in real estate. That is why Samuel said that the key to good property investments is “location, location, location.” Playing to that, know your needs or those of your market. 

If you have children or plan on renting to families, you look for homes near great schools and shopping centers. If you’re a business owner, you’ll look for properties near office buildings or that have at least one room suitable for in-home office space. If you want to rent to college students, get a property near the universities, on bus lines, and close to restaurants, bars and other entertainment venues. 

In other words, the key to knowing the right location is knowing the needs of those who will be dwelling within. 

You Now Know 5 Things About Residential Real Estate Buying in 2021

And now you know what we believe are the 5 most important things about buying real estate in 2021. What about 2022, ‘23, and beyond? And is there more to know?

Naturally, there is always more to know so be sure to bookmark this blog and return often. Still, these five tips on buying properties as a home or as an investment should suffice for any year. And, of course, at Lundervold Financial we are here to advise you about your investments, so put our number in your phone: 651-209-1906. If reading this on your phone, just tap it now. We would love to hear from you. 

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Disclosures

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Neither our firm nor its agents or representatives may give tax or legal advice. Be sure to speak with a qualified professional about your unique situation.

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Lundervold Financial are not affiliated companies.

Any and all other services referenced are an outside business activity not offered through or supervised by AE Wealth Management.

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¹ James Harris. Bond Street Partners via Entrepreneur.com. Nov. 16, 2017. “5 Reasons Why Real Estate Is a Great Investment.” Accessed Jan. 18, 2021.

² The Oracles. CNBC. Oct. 1, 2019. “Real Estate is Still the Best Investment You Can Make Today, Millionaires Say — Here’s Why.” Accessed Jan. 18, 2021.

³ Brenda Richardson. Forbes. March 10, 2020. “As The Coronavirus Spreads, It’s Not Business as Usual for Real Estate Agents.” Accessed Jan. 18, 2021

⁴ May Wong. Stanford News. June 29, 2020. “Stanford Research Provides a Snapshot of a New Working-From-Home Economy.” Accessed Jan. 18, 2021.

⁵ Laura Agadoni. Motley Fool. Oct. 18, 2020. “5 Things You Should Know About a Real Estate Market Before Buying a Home.” Accessed Jan. 18, 2021.

⁶ Jason Fernando. Investopedia. Nov. 29, 2020. “Law of Supply and Demand.” Accessed Jan. 18, 2021.

⁷ Bureau of Labor Statistics. “Labor Force Statistics From the Current Population Survey.” Accessed Jan. 18, 2021.

⁸ Roy Maurer. “Study Finds Productivity Not Deterred by Shift to Remote Work.” Sept. 16, 2020. Accessed Jan. 18, 2021.

⁹ RemoteYear. “WHAT IS REMOTE WORK?” www.remoteyear.com. Accessed Jan. 18, 2021.

¹⁰ Dave Ramsey. Jan. 13, 2021. “Real Estate Trends 2021: What You Need to Know.” DaveRamsey.com. Accessed Jan. 18, 2021.

¹¹ FreddieMac. 2021. “15-Year Fixed-Rate Mortgages Since 1991.” Accessed Jan. 18, 2021.

¹² National Association of Realtors. Dec. 10, 2020. “Top Economic and Housing Experts Predict Post-Pandemic Rebound With Continued Job Growth, Stable Interest Rates in 2021.” www.nar.realtor. Accessed Jan. 18, 2021.

¹³ Nickolas Strain. Jan. 20, 2021. “Can I Use My 401(K) to Buy a House?” Investopedia. Accessed Jan. 18, 2021.

¹⁴ William Safire. June 26, 2009. “Location, Location, Location.” The New York Times Magazine. Accessed Jan. 18, 2021.

¹⁵ Danny Haydon & Neeraj Kumar. Sept. 21, 2020. “Industries Most and Least Impacted by COVID-19 from a Probability of Default Perspective – September 2020 Update.” S&P Global Market Intelligence. Accessed Jan. 18, 2021.