The COVID-19 pandemic is a time of turmoil that has had an instant and significant impact on all aspects of our lives. For investors, these periods of economic and upheaval contraction offer both great opportunities and considerable challenges. As a real estate investor, it’s important to know what the implications of investing during this pandemic are.
The impact on property prices
- Fewer buyers, no home price growth. 48% of real estate agents reported fewer buyers. However, only 16% of the real estate agents reported sellers pulling listings. This reduced demand will prevent home price growth. Actually, property prices are currently dropping.
- Economic recovery, jump in property prices. When the economy starts recovering, demand will rebound; but the supply will be insufficient for a while, which will lead to an increase in property prices.
- Limited new home construction, home shortages. The reduced demand will also limit new home construction. In the long run, this will cause home shortages, especially among starter homes.
Opportunities for real estate investors
- Distressed sales. This is a sensitive topic that refers to sellers who, for various reasons, have an urgent need to sell their properties and would rather settle for a fast and secure settlement than a high price.
- Lower market pricing. As the demand for home buying declines, we continue to see home prices drop. Those who lost their job in this recession, for example, people in the tourism, hospitality, leisure sectors that got hit particularly hard by this crisis may need to sell their properties before falling into foreclosure and be willing to do so below market value. All this exacerbates economic downturns and has a ripple effect through the local market, causing other homes to drop in value.
- Potential house price increase and inflation. Congress and the Federal Reserve inject trillions of new dollars into the economy, which will most likely cause inflation to hit hard (sooner or later) during the economic recovery. The good news is that real estate makes the ideal hedge against inflation. Historically, the housing industry helps pull the economy out of recessions. Everyone needs a place to live and the real estate industry creates and maintains a lot of jobs, both directly and indirectly.
Challenges for real estate investors
- Flipping properties is challenging right now. Investors who intend to flip a property need to be pretty certain of their timelines. Can you get the house renovated, listed, and sold quickly? When do you estimate that each step can be completed? This is important because even if a small drop on home prices is on the horizon, the process can be a race against the clock. You should also consider the potential for supply and labor shortages in your local area. Increased delays can cause a loss of money, as carrying costs accumulate over time.
- Vacation rentals aren’t doing well. Tourism was hard hit during the pandemic, which took another revenue strategy off the table for real estate investors. Vacation rental landlords can instead find alternative uses for their properties. For example, they can convert them to long-term rentals while keeping in mind that this is a time when fewer renters want to move. Another solution is to convert the properties to corporate rentals while knowing that fewer people travel for work. Whichever option, there’s some risk associated with it.
- Rent defaults. These are unprecedented times and the previously-strong rental industry is now challenged. A risk of traditional long-term rentals is represented by defaulting tenants. With the unemployment rate growing, numerous tenants can’t afford to pay their rent. In some areas, it’s illegal to evict tenants who aren’t able to pay due to the pandemic. This makes it pretty hard to get excited about investing in a rental property. In order to avoid being forced to sell your properties, you should have a cash cushion that you can rely on in case you don’t collect much in revenue until the downturn stabilizes. Additionally, as a property owner, you can apply for mortgage relief.
As a real estate investor, being cautious and clearly understanding the opportunities and challenges during the COVID-19 pandemic is essential. Remember that as the rental market is intensely local, most likely the coronavirus’s effects will be intensely local as well. The decision of whether you should or should not invest in a certain area has to be based on your understanding and knowledge of the local rental market along with the collaboration with a trustworthy private lender.
Also Check Out: What Every Real Estate Investor Needs to Know About COVID-19