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Buy-and-hold real estate investing during the Coronavirus pandemic
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Commercial real estate investing during the Coronavirus pandemic
Like many businesses across the country, many real estate investors will have to have to reevaluate their business model in the wake of COVID-19. Fortunately, the extent by which investors are expected to change shouldn’t be as drastic as other industries.
Historically, disruption within the real estate sector has resulted in amazing wealth-building opportunities. Today’s most prolific investors will be those who are savvy enough to identify such in the constantly evolving housing sector.
Fortunately, the best Coronavirus real estate strategies are among the same strategies investors have already been using successfully for years. Keep reading to discover which real estate exit strategies will be the most viable during the current pandemic.
Best Real Estate Strategies During Coronavirus
There is no doubt about it: The Coronavirus has changed the way many people view the real estate market. That said, change isn’t necessarily bad. Many of today’s successful investors are the direct result of drastic fluctuations in the marketplace. Disruptions in the housing sector offer great opportunities for savvy entrepreneurs. However, that change will only work in favor of those who are willing to adapt to the shifting landscape.
Investors may turn to several Coronavirus real estate strategies to not only survive in the new environment, but also thrive. To do so, the following exit strategies should be considered:
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Investing In Buy-And-Hold Real Estate
Of the many Coronavirus real estate strategies investors may deploy in today’s marketplace, none may be more viable than building a rental property portfolio. Otherwise known as a passive-income or buy-and-hold real estate, the market currently appears very conducive to aspiring landlords.
For starters, rental property portfolios are already viewed as one of the best wealth-building vehicles in today’s economy. Buy-and-hold real estate strategies have been justified by decades of appreciation and cash flow. Home values and rents have traditionally increased more than they have decreased over long periods of time.
“Prior to 2007, historical housing price data seemed to indicate that real estate prices could continue to rise indefinitely. In fact, with few exceptions, the average sale price of homes sold in the U.S. climbed steadily each year from 1963 to 2007—when the housing bubble burst and the financial crisis of 2008 ensued,” notes Investopedia. Of course, the bubble implies price declined, but only temporarily.
Following the last downturn, the median home value in the United States went on to appreciate 54.5% (from May 2012 to today), according to Zillow. While declines are expected, history has taught us that home prices are likely to bounce back, which bodes incredibly well for rental property owners.
Furthermore, today’s decline in housing activity and the expected drop in home values could represent a lucrative buying opportunity for prospective buy-and-hold investors. According to Zillow, median home values are forecasted to drop a modest 1.5% over the next 12 months. While that may not seem like much, it represents a break in about eight consecutive years of appreciation; In addition to historic price trends, this suggests the Coronavirus may have created a window for buyers to take action.
If that wasn’t enough of a reason to consider buying a rental property today, the Federal Reserve has dropped the benchmark interest rate to historic lows. In an attempt to stimulate the economy in the midst of a pandemic, interest rates are lower than they have ever been. At 3.54%, today’s average interest rate on a 30-year fixed-rate loan is hovering slightly above record lows. . The drop could save many buy-and-hold investors tens of thousands of dollars over the life of their loan, further increasing the cash flow of “in-service” rental properties.
Investing In Commercial Real Estate
The toll the Coronavirus has taken on commercial real estate presents today’s investors with a great opportunity. For more than two decades, real estate entrepreneurs have turned to apartments, industrial warehouses, retail neighborhood centers, and central business district offices in economic downturns.
That’s not necessarily because of the immediate returns, but rather the future prospects of acquiring a proven asset at a discount. Now more than ever, it may be easier to acquire commercial property at a discounted cost. In fact, there appears to be at least four sectors in which buying below-market commercial real estate now could pay off in the future:
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Hospitality: The hospitality sector has been severely impacted by “shelter-in-place”orders. Hotels and event spaces have seen a significant decline in business. As a result, some hospitality businesses may be looking to sell, which could represent a great buying opportunity. Investors able to secure good deals today could see the commercial real estate space bounce back as early as the end of this year or 2021. That said, there’s a good chance the hospitality industry will recover, which makes any discount today attractive.
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Senior Housing: Not unlike the hospitality industry, the senior housing sector has also been hit hard. However, there was an over-saturation of senior housing facilities even before the pandemic. That would suggest weaker business may be inclined to sell. If the price is right, now may be a good time for commercial investors to look into senior housing facilities because the need for their services will never go away. In fact, with the Baby Boomer generation on the brink of mass retirement, there’s an argument to be made that there will be a growing demand in the near future.
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Office: Office buildings have taken a big hit as a majority of people are working from home and will continue to telecommute even after the pandemic. This means commercial real estate investors will want to be extra selective in their office building purchases. Work from home trends have the potential to be a detriment to poorly located buildings, so it’s a smarter idea to purchase in established business areas as opposed to residential offices.
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Self Storage: Self storage may be a bit of a contrarian play at the moment, but it’s worth looking into. Traditionally, self-storage buildings have seen an uptick in business over the course of downturns. As more people are forced to move or downsize, self storage becomes more necessary. However, at a time when unemployment is reaching historical levels, self storage may be seen as more of a luxury than a necessity. If that’s the case, keep an eye out for strong locations, in low supply, run by strong operators.
Investing In REITs
Otherwise known as real estate investment trusts, REITs are companies which own, operate, or finance income-generating real estate assets. Investing in REITs involves investing in these companies via the stock market. Not unlike buying a stock from a broker, REITs may be purchased one share at a time. In fact, REITs are modeled after the same mutual funds most people are familiar with (with a few exceptions).
With the ability to buy one share at a time, REIT investing allows anyone access to the real estate industry, without having to invest in a physical property. By investing in an REIT, shareholders are investing in a company whose profits are primarily generated from real estate. Investors who don’t have the funding to buy a house of their own may be able to start an investing career in the REIT sector.
The relative affordability of REITs is particularly attractive in an uncertain environment. With unemployment numbers increasing, more investors may seek refuge in REITs.
“Unemployment hit 14.7%. That’s the highest unemployment rate for the series going back to 1948 and also the biggest jump, with the unemployment rate tripling in a month since March,” according to Forbes.
The sheer volume in unemployment applications has many people sticking to a tighter budget, and investors are no exception. As a result, now may be a great time to consider investing in REITs. Doing so will grant exposure to the real estate industry without the prohibitive pricing. That, and investors will still gain access to many of the benefits associated with investing in REITs. Those benefits include:
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History Of Competitive Performance: Over the past 40 years,the returns generated by REITs have outpaced traditional stocks. According to Nareit, “in the longest period measured by the Russell 3000 Index of the broad U.S. stock market—from Dec. 31, 1978, through March 31, 2016—total returns for exchange-traded U.S. Equity REITs have averaged 12.87 percent per year compared to just 11.64 percent per year for stocks.”
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Liquidity: With REITs being listed on major stock indices, investors may access their capital relatively easily. Whereas physical assets may take longer to tap into equity, REIT investors simply need to sell their shares to gain access to the cash they need. In today’s environment, this particular benefit is very appealing. The ability to gain access to cash immediately could help people through some tough times.
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Dividend-Based Income: In order to be classified as an REIT, companies need to pay at least 90.0% of their taxable income to shareholders. Otherwise known as dividends, the disbursement of funds that REITs are required to payout are a great wealth-building vehicle for savvy investors. Dividends can boost an investor’s bottom line, and it certainly doesn’t hurt that REITs have to pay them.
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Diversification: REITs invest in several industries, not the least of which include mortgages, retail, commercial and residential. Therefore, it’s entirely possible to diversify one’s portfolio with a diverse group of REITs. In today’s market, for example, warehouse REITs are becoming a nice hedge against the Coronavirus. As the transition to e-commerce speeds up, online retailers like Amazon are investing heavily in warehouses. As a result, warehouse REITs have seen attractive growth.
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Transparency: Since they are regulated by the Securities and Exchange Commission, most REITS are required to divulge important information; doing so keeps REITs honest and accountable.
While REITs aren’t the first thing that comes to mind when people think about investing in the housing sector, they are a great Coronavirus real estate strategy. In addition to being more affordable at a time when people are worried about money, they have proven they are capable of realizing attractive returns over time.
Tax Lien Investing
Slightly less direct than the Coronavirus real estate strategies mentioned above, tax lien investing is poised to gain more traction in the coming months. Impending financial hardships brought about by the Coronavirus are expected to hamper homeowners’ ability to pay many bills, including property taxes. With more homeowners unable to maintain their property tax obligations, there should be a spike in the number of tax liens levied on property owners.
Tax liens are placed on homes when the owner becomes delinquent on payments. As a last resort (following many warnings), the local municipality will attempt to force the owner’s hand to pay their taxes. In doing so, the government makes a legal claim against a taxpayer’s asset.
According to Investopedia, “the tax authority can then use a tax levy to legally seize the taxpayer’s assets (such as bank accounts, investment accounts, automobiles and real property) in order to collect the money it is owed” if the tax continues to go unpaid.
Sometimes however, the government entity will sell the tax lien certificate to a subsequent investor in order to avoid going through the time consuming process. If the investor is able to pay off the amount the government was originally hoping to collect, they may assume ownership of the tax lien certificate. The homeowner will then be expected to pay what they owe to the new lien certificate holder (the new investor).
How To Find Properties During Coronavirus
Learning how to find properties during Coronavirus will borrow a lot from traditional investor strategies (i.e. identifying and securing distressed homes.) Despite foreclosures declining for the better part of a decade, financial hardships brought about by the Coronavirus are bound to increase the number of distressed homeowners in the United States. This means, investors should focus their efforts on finding these types of properties.
In anticipation of more foreclosures, and an attempt to mitigate filings, the government has enacted a number of forbearance programs. As their names suggest, forbearance programs are designed to act as a temporary postponement of mortgage payments. Since unemployment numbers are higher than they have ever been, the government hopes the use of these programs will keep more people in their homes and prevent them from defaulting on loans. That said, the programs aren’t designed to last forever, and compounding payments over the course of the programs could actually cause more harm than good.
“Homeowners with government-backed loans—and even many without—are being offered up to 12 months of forbearance, doled out in 90-day chunks. But this temporary fix could result in another wave of foreclosures in the future if additional assistance isn’t provided,” according to an article on Realtor.com.
Pre-foreclosures have declined 13.9% year over year, but the presence of the Coronavirus will most likely change things. According to the Mortgage Bankers Association, “the share of all U.S. mortgages in forbearance rose to 7.91% during the week ended May 3, from 7.54% in the prior week.” To put things into perspective, the Mortgage Bankers Association notes “the overall forbearance rate was 0.25%” prior to the global crisis.
The rise in forbearance programs suggests more homeowners are experiencing financial hardships. As many forbearance programs run their course and more owners fall farther and farther behind on payments, the chances of pre-foreclosures increasing will rise. When that happens, the information of the delinquent homeowners will become public knowledge. Those looking to find these homes will simply need to visit their local courthouse and scour the files for the contact information.
Summary
The pandemic impacting every level of the economy is unfortunate, but it is important to note that disruptions in the real estate industry tend to create opportunities. In response to what has recently transpired, a number of Coronavirus real estate strategies have emerged as very viable investment options. That’s not to say these particular exit strategies weren’t already being used by today’s most prolific investors, but rather that the Coronavirus and the real estate market aftermath have made them even more relevant than before. Investors who position themselves well today by implementing any or all of these Coronavirus real estate strategies may come out on the other side of this pandemic even stronger than they went in.
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