Real estate, like the stock market, is at its highest level in history, with many markets seeing home prices rise between 20%-40% or more in a single year. While that's great news for those who already own real estate, it's not ideal for those who want to get started.
Despite today's high prices, there are still opportunities in the coming year. And given the multitude of options available for investing in real estate, these five moves will help you make the most of the real estate market in 2022.
1. Invest in the right REITs
Real estate investment trusts (REITs) are a great way to gain exposure to the real estate market without having to invest large sums of money, particularly at today's high prices. These entities, which use a tax-advantaged structure to invest in and own real estate and real estate-related securities, can be a great avenue for new investors.
Like stocks, REITs can be purchased through a brokerage account and give investors access to high-quality portfolios of real estate managed by experienced and highly qualified fund managers. REITs ultimately provide investors access to expensive real estate without having to pay the premium to purchase it themselves.
REITs performed incredibly well in 2021, achieving a 28% return year to date. But REITs aren't immune to market corrections or negative impacts from the economy or real estate market as a whole. So if you do choose to invest in REITs, it's important to choose the REIT wisely and focus on quality companies in high-growth sectors like industrial real estate, multifamily, or possibly self-storage.
2. Assess risks
The new coronavirus strain, omicron; inflation; continued supply chain interruptions; and most recently, the default by Evergrande are creating a lot of volatility and uncertainty in the market. Predictions for where the stock market, real estate market, and economy are headed in 2022 are all over the map. Some believe we're poised for a minor correction, others say we're going to see another strong year of growth, and still others believe the stage is set for a crash of epic proportions.
While no one knows exactly what is going to happen in 2022, this could be a great time to make sure your portfolio is well positioned in the event of a pullback, big or small. Over-leverage is one of the biggest vulnerabilities investors face during a market crash. That's why it's a good idea to assess each of your investment positions as it relates to the investment's return, any debt associated with the investment, and its value today. If you already own real estate, it might be an advantageous time to sell certain properties to increase liquidity if needed.
3. Continue saving
No matter where the market goes in 2022, cash is king. Whether the market is up or down, you won't be able to invest in new opportunities without the funds to purchase the investments. Continue to set aside money to invest in real estate, at a minimum of 15%, which can be through your retirement account or in addition to it.
4. Improve your creditworthiness
The Federal Reserve has indicated its plan to increase interest rates in 2022 to try to combat rising inflation. This means it will be more expensive to purchase a home with financing in 2022. To improve your likelihood for financing approval, and hopefully get the best possible rate, you'll want to make sure your credit and ability to be financed are in tip-top shape.
Look at things like your debt-to-income ratio and credit score for starters. While not every real estate investment will require financing, if you plan to actively buy and own real estate, it's likely you'll be getting a mortgage in some form or fashion, and having solid credit will improve your chances of getting approved.
5. Explore the various avenues for investing in real estate
There are myriad ways to invest in real estate outside of investing in REITs, including rental real estate. Rental properties -- either as short-term vacation homes or rented to long-term tenants -- can be an excellent way to generate passive income, be exposed to property appreciation over time, and reap tax benefits. However, it does come at a higher cost, generally 20% of the purchase price as a downpayment. It also requires more active and ongoing management, although this can be alleviated some through a property management company.
While pricing is high, this can be a great time to do research on alternative methods like commercial real estate, fix-and-flip real estate, or others. Right now is an ideal time to assess opportunities in the market and look toward long-term trends that will likely overcome any market corrections.