
While the national real estate market faces significant uncertainty right now, it’s important to recognize that past crises, like the Great Recession of 2008, have taught us valuable lessons on how to operate when the future isn’t so clear. For real estate investors, staying out of the market until stability is returned is certainly a valid option. But for those who may have weathered the real estate storms of the past and don’t wish to close up shop during the current crisis, and for new investors who aren’t sure how to proceed right now, let’s review four core principles to guide real estate investors through a time of crisis.
1. Patience
With the recent spike in unemployment, regrettably, it’s only a matter of time before we see homeowners who are unable to continue making their mortgage payments either selling their properties quickly and for a discount to avoid foreclosure, or being foreclosed on. It’s an unfortunately common occurrence in times of crisis that individuals who would otherwise keep their homes end up needing to sell.
As inventory increases due to the fallout of this crisis, investors need to practice patience and be more selective. Profitable investments that may have seemed rare not so long ago will likely become just one of many. It’s key to be patient and wait for a property with a large profit margin that can withstand a possible hit in resale value (which we will touch on in the next section). Now is not the time to rush into a new deal; now is the time to methodically analyze properties with large margins before making any decisions.
2. Cost Analysis
Global crisis or not, significant property analysis should be a pillar of every investor’s strategy. However, during times of crisis, properties need to be analyzed with elevated costs and risk factors to avoid taking on “the deal that broke the camel’s back.” This comes in the form of the increased cost of capital for investors using leverage instead of cash.
Just like investors, traditional banks and private money sources alike need to prevent overextension and mitigate excessive risk right now. As lenders like myself are analyzing deals more strictly and lending more conservatively, investors can expect to see some of the following changes when approaching a lender:
• Higher interest rates.
• Requiring at least 20% down.
• Requiring a proven track record and higher credit score from the borrower.
• The property must be in a proven investment area.
In addition to changing front-end cost analysis, investors need to be aware of the “falling knife” concept during a crisis. We don’t know if real estate prices are going stabilize where they are or drop significantly. The safe bet is to purchase when prices have bottomed out, not during free fall where, a few months into the project, it could have lost significant value. To account for this risk, purchases need to be made at such a discount that the property can withstand at least a 10% drop in repair value, should the market drop between purchase and resale.
The higher costs of capital and possible loss in resale value mean that some investments that made financial sense in 2019 or early 2020 may no longer have a desirable profit margin at this point.
3. Liquidity
Since no one can predict the future, an investor’s ability to liquidate a property quickly is key. Now more than ever, investors should be focusing on property types and areas with the lowest days on market.
In a worst-case scenario, buyer demand could disappear entirely after the property was purchased, which is why investors should analyze new deals as both a fix-and-flip as well as a rental property. Investing in a property that has rental comps gives an investor multiple exit strategies depending on the market’s appetite when renovations are complete.
To maintain the option to rent, investors will likely need to choose projects within the middle of the market after repairs. This comes with another added benefit: buyers with federally backed loans. The low down payment requirements of federally backed loans make them an attractive option to buyers who don’t want to empty their bank accounts during a crisis. To cast a wide net over buyers by catering to the federally backed loan market, investors should look for properties that will resell within their loan limits. To find what the limits are for any county in the United States, there is an FHA loan lookup tool.
4. Insulation
In every recession, some areas are hit harder than others. An analysis of recent cycles on the 50 largest U.S. metro areas shows the large disparity between the hardest hit and least affected United States cities during the Great Recession. The areas most and least impacted can change from crisis to crisis. However, the important takeaway is to look for insulating factors. These are some of the key insulating factors to look for:
• Large numbers of government and military jobs.
• Large institutions that can withstand economic fluctuations.
• New growth projects and major developments taking place.
For example, the Washington, D.C. metro area is fortunate to have an insulated market backed by massive federal employment, large institutional companies, satellite headquarters and major growth factors, such as Amazon HQ2, The Wharf Phase 2 and The Parks at Walter Reed. These insulating economic factors mean it is less likely that the buyer pool will disappear, even during or after a crisis. The stability brought by such an insulated market was one of the primary reasons that I started my business in the area in the first place.
There is a wide range of factors that real estate investors should be considering before making a purchase in our current (or any) crisis, but patience, cost analysis, liquidity and insulation are excellent principles to start with. Investors who stay smart and deliberate will get through this crisis and might even come out on the other side with some well-earned cash.
Source: Forbes
You May also Like this
The pandemic may have brought drastic changes to our daily lifestyle, however...
Online real estate catalogues include virtual tours of sample flats to give...
There are two main schools of thought when it comes to :...
is one of the most dynamic industries that have seen some major transitions in...
For a long time now, real estate has been seen as a cash flow-generating...
With the economy fluctuating, more investors turn to the real estate market...
During this , social unrest and an upcoming election, a lot has...
In the “real” world, has historically been seen as a viable investment....
Understanding macroeconomic risk is critical to a successful strategy. While this form...
Illiquidity premium is the excess return an investor stands to earn in...
Adapt. Innovate. Accelerate. This is the mantra for any business right now...
wholesaling is a kind of arbitrage in which a party known as a wholesaler...
Months after the onset of Covid-19, we continue to see its impact...
Prospective buyers getting their first glimpse of potential homes through smartphone cameras...
The pandemic crisis has thrown nearly all industries for a loop, and...
What do Google, Microsoft, Facebook, Twitter, Visa and American Express all have...
The COVID-19 pandemic is having a transformative impact on (CRE) markets. The...
Your current financial stability doesn’t guarantee that you’ll be free from financial...
If you’re investing in property, you’ll need accurate real estate valuations to...
A myriad of publications have already pronounced office space a trend of...
The current pandemic and global response is a once-in-a-lifetime event that has...
real estate investments will fare well in the face of the coronavirus, which...
New York, NY—With the shift towards buying an experience over buying a...
Passive income is an important factor in building wealth and achieving financial...
We've all seen studies on millennials circulating around the internet. As the...
I’m often asked what my preference is when comparing angel investing to...
Two popular avenues, real estate and bitcoin, have been making waves in...
Private real estate affords investors considerable control over their , from how...
Engaging the right attorney helps you avoid costly mistakes in deals. Especially...
The regulatory bodies in real estate include but are not restricted to the following;...
Deloitte’s 2020 Commercial Real Estate Outlook surveyed 750 owners, operators and investors in 10...
Most new investors in active real estate start with a traditional method...
Millions of Americans depend on cash flow generated by long-term investment portfolios,...
There is a common misconception that real estate investing requires property ownership....
Planners have charged the Lagos state government to do more detailed master...
The commercial real estate industry has entered a new phase of technology...
Buying a home is one of the most expensive decisions you'll ever...
Americans are spending less on home renovations than they were at this...
Are you thinking about purchasing your first piece of real estate? Investing...
Are you ready to invest in real estate? Real estate funds and real...
Real estate transactions often involve significant amounts of money. As a result,...
Investing in real estate is tremendously exciting, and can be very lucrative....
Ahmed Dangiwa, Managing Director, Federal Mortgage Bank of Nigeria (FMBN), said the...
Real estate markets trend between times of boom and bust, depending on a...
Malcolm Gladwell states that it takes 10,000 hours of practice to become...
Purchasing a home is a huge financial commitment, so finding the right...
The long-awaited overhaul of the National Urban Development Policy (NUDP) has been...
Everyone knows that retail is evolving, and common thought says that retail...
In cities, mixed-use real estate is hidden everywhere. Someone likely lives above...