Investing in Real Estate during unstable market conditions

22 May 2020 Shared By AC

The real estate industry is filled with its share of ups and downs. In an unstable market, property values may plummet without a moment’s notice. While we’re not facing the same kind of issues we met a decade ago, today’s plunges in the market can be worrying for a real estate investor buyer.

The best way to deal with these kinds of investments is to hedge your bets. Information is the most valuable resource you have and knowing what elements you should consider before investing in a property is essential to turning a profit. Sixteen members of Forbes Real Estate Council look at the vital considerations you should make before investing in a real estate property during unstable market conditions.

1. Investment Type And Goals

Investment strategies should strategically marry market conditions and personal goals. The type of investment, time in the market and ultimate investment goal can all act as hedges against market shifts. Some investments may not make sense right now, but several will. Find the opportunity in the storm. Tread carefully, but tread. – Kofi Nartey, SOCIETY Real Estate + Development

2. Today’s Price, Tomorrow’s Value

In short, be a realist. Have three scenarios of how things can play out during the disruption, weigh them and apply a large cash cushion onto the capital stack of the deal that’s tailored around your risk preferences. Due diligence is more valuable than ever, so dive deep on every lease and every loan covenant. Buy into tomorrow’s value at today’s price and ensure you have the runway to get there. – Syed Ali, Time Equities Inc

3. Sources Of Income

Know where the income is coming from. Where do the tenants work and how are those industries being impacted by the COVID-19 crisis? If the rent is subsidized by HUD through Section 8 or another source, then it could be a great time to buy. – Kyle Shoemaker, Affordable Housing Investment Brokerage, Inc.

4. Options And Expectations

When the market has so much volatility, investors need to think more strategically about acquisition and disposition. Come in with multiple strategies, longer inspection periods and stick to products that you know could cash flow as a hold if necessary. Be upfront with sellers about your options, pricing and contingencies, as well—it’s only fair for all parties. – Tracy Royce, Royce of Real Estate

5. Credit Exposure

Some industries are outperforming others. With the small amount of lenders still willing to provide loans, the tenant’s industry will matter. Anything related to cruise, airline, hotel or event production will have a problem. Anything related to food, medical or critical distribution operations will be looked upon more favorably. – Larry Genet, CBRE

6. Seller Alignment

In light of market uncertainty, investors should align the property seller’s objectives to sell at a market clearing price with their property valuation. They can achieve that by utilizing more defensible, conservative assumptions. – Babak Ziai, BrandView Capital Partners

7. Projected ROI Models

During an uncertain market, investors should stick to conservative CAP rate projection models for income properties by calculating based on future lower rental rates. For fix-and-flip properties, get conservative ROI projection models by calculating a lower ARV. – Mor Zucker, Team Denver Homes – RE/MAX Professionals

8. Price In Risk

We are still actively buying properties, but we’ve had to take steps to limit our risk. We’re now taking into account a discount on what properties will ultimately sell for when we’ve completed the project and we’re giving sellers options with how we buy that will help us mitigate large cash outflows at the time of purchase. Also, who’s still having success in your local market? Call them today. – Randal McLeaird, SA House Buyers

9. Diversification Of Portfolio

Look for areas that aren’t too dependent on industries that will take time to recover (i.e., travel, hospitality, retail, etc.). Investors need to be able to make a prediction on what they think will happen in the next couple years and diversify their bets across different geographies and portfolio types. – Nathaniel Kunes, AppFolio Inc.

10. Worst-Case Scenarios

Price your uncertainty. Make assumptions as to worst-case scenarios for bad debt (delinquencies) and vacancy. Then adjust the price until the deal works for you. For example, a worst-case scenario is 40% of delinquencies and 25% vacancy. With a $5 million price cut, returns are 7% cash-on-cash. You have to be ready to take a risk here, and be prepared to get low or no returns in the short term. – Ellie Perlman, Blue Lake Capital LLC

11. The Long Range

Market upheaval will inevitably create market opportunity. Motivated sellers will reveal themselves and having an ear to the ground, so to speak, will allow these opportunities to be present. Having an investment horizon beyond the current economic cycle puts less pressure on timing the market perfectly. Simply take advantage of the moment in a larger sense. – Jeff Brown, Tahoe Mountain Realty

12. Proper Debt And Deal Structure

Uncertain markets are where the strong deals get made. A big part of success is tied to proper structuring of the deal from the debt to the terms. For debt, given the current state of the market, we love deals where we chose to go in lower leverage—about 60% vs. the 80% most are doing. For terms, it’s important to give yourself ways to extend and back out in order to help navigate the choppy market as needed. – Feras Moussa, Disrupt Equity

13. Median Income And Price Point

Choosing an investment property that aligns with the area’s median income and price point is your safest bet. If and when a recession hits, your home will then remain competitive despite upheaval and uncertainty. Buying at too high a price point can set you up for failure when income levels or the stock market drop. – Jennifer Anderson, Anderson Coastal Group

14. Who Your Tenant Is

Let’s say you have a 1031 exchange. Your money is with your exchange accommodation and now you need a replacement property. What are you going to buy? If you are looking for income, you’re buying the tenant. As such, you need to know who they are and what they do and this goes across the product classes. Know who owes what and if they can pay you according to the contract. Investigate. – Michael J. Polk, Polk Properties / Matrix Properties

15. Fundamentals Of Investment

In times of uncertainty, the best plan is to stick to the foundation of solid real estate investments. Make cash flow a top priority. It is not the time to try to increase market share, but to look internally. As the whirlwind of uncertainty swirls around outside, improve foundational capabilities. All uncertain times eventually settle and you will be better, faster and stronger when it does. – Bobby Montagne, Walnut Street Finance

16. Short- Or Long-Term Investments

In times of distress and uncertainty, there is typically opportunity. However, a recession does not necessarily imply a real estate market collapse. In these current times, it is for certain that you have the most motivated buyers and sellers in the marketplace. Short-term investments currently have a larger risk due to uncertainty. Real estate is always a good long-term investment. Structure wisely. – Jordan Mott, Jordan Mott Real Estate Group

Source: Forbes

Investing in Real Estate during unstable market conditions

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