With no foreseeable end in sight when it comes to the ongoing pandemic, many real estate investors are pondering whether the timing is right to add properties to their portfolio given what is and will likely continue to be a very unpredictable market.
Real estate investors are likely to find more good deals on homes than under previous normal conditions. there are a multitude of very motivated sellers out there that are eager to prevent their property from lingering on the market. But how do investors account for the risks that rental property landlords face in the current coronavirus era?
As you analyze the market and determine whether to invest in real estate while the coronavirus pandemic is still continuing, it’s important to take into account the following opportunities and their associated risks carefully, and then conduct your own specifically tailored personal risk-benefit analysis to choose your next move.
Opportunities Abound for Real Estate Investors
Initial reports garnered from data compiled by the National Association of Realtors (NAR) indicates that a significant majority of buyers have exited the market as compared to sellers. By the end of March 2020, approximately 48% of real estate agents claimed they had buyers withdrawing, whereas only 16% of sellers claimed they had chosen to take their listings off the market due to COVID-19.
This means that the housing sector is already experiencing the tenuous balance between supply and demand shift considerably in the favor of those looking to acquire real estate. With dissipating demand and a relatively stable supply base, great deals can be found in virtually every locale with the right motivated real estate investment mindset.
There are some home sellers with the financial base who can afford to wait out this challenging period. However, the vast majority are experiencing an urgent need to sell due to the fact that they cannot make multiple mortgage payments on vacant homes. These individuals need to sell now, even if it means drastically lowering their initial asking price.
These types of extra-motivated sellers create an invaluable opportunity for real estate investors. Motivated property owners have always comprised the majority of great off-market transactions, and in the near future, many sellers will find themselves with no other alternative but to accept reduced offers due to the relative lack of home-buying demand in most local markets. That makes this an ideal time for real estate investors to go after distressed sales and be aggressive during the negotiation phase of transactions.
Understanding the Risks
Notwithstanding the obvious upside, real estate investors and rental property landlords will experience very real risks and challenges in the current market environment caused by the coronavirus. Prior to shelling out hundreds of thousands of dollars or more on an investment home, ensure that you fully comprehend the wide-ranging impacts of the coronavirus pandemic on the real estate investment industry.
One of the main risk factors is the comparable lack of exit options. Put simply, you don’t want to find yourself in the same predicament as the aforementioned extra-motivated sellers. The last place you want to find yourself from an investment perspective is being forced to sell during the coronavirus. This risk is particularly evident for house flippers, as well as for any rental investors who typically garner capital by selling off properties from their portfolio to fund future projects. Landlords will also face the dual risk of eviction challenges and increased default rates. With unemployment skyrocketing many renters simply will not be able to afford rental payments and several states and cities have accordingly placed temporary suspensions on eviction proceedings while others have closed civil courts—preventing landlords from conducting a rent hearing which is a required step in the eviction process.
Mitigating the Risks
How can real estate investors proactively shield themselves from these risks in order to seize the unique opportunity presented by the COVID-19 impact on the industry? First, they should consider prioritizing investments in jurisdictions that have implemented ordinances that favor landlords. Having the option to evict in the event of a default is a lifesaver for real estate investors so it can pay off down the road to direct your investments to areas that allow for that method of financial relief.
It will also pay off to maintain adequate cash reserves as investors with deep pockets will inevitably come out ahead in this environment. Those will little liquidity will find themselves both unable to participate in the market dip and financially strapped when they face rent defaults or extended periods of vacancy. To avoid this, be sure to set aside enough cash to cover several months of unpaid rent for each investment property in your portfolio and keep an eye on your emergency fund as you may well need to rely on it in the coming months where things are still largely unpredictable.
At Andelsman Law, our attorneys are committed to advising and representing real estate professionals in a wide variety of real estate transactions. If you would like help navigating your next deal, we would love to partner with you.