What is the Investment Opportunity in Distressed Real Estate (if Any)? – HomeUnion

What is the Investment Opportunity in Distressed Real Estate (if Any)?

When the coronavirus shut down the American economy and dominated the airwaves, real estate investors expected a deluge of distressed properties–assets that have been foreclosed or made available for sale by the owner. 

And while the effects of the coronavirus have been widely felt, not every type of real estate property has been equally affected. 

That means that there are several strategies real estate investors can take. 

What have been the effects of the coronavirus on real estate investment?

The coronavirus pandemic has had some immediate effects on real estate.

  • Consumer confidence, which is the measure of how optimistically people feel about the economy and their own financial situation, is low. This means people aren’t clamoring to purchase a new home right now.
    • The Present Situation Index, which measures consumer sentiment, dropped 90 points in April because of coronavirus, the greatest drop in its history.
    • Consumer confidence is slowly increasing but it is far below where it was prior to coronavirus.
    • The future is uncertain because of coronavirus (and the 2020 US election).
  • Mortgage lending standards have become more strict given the detrimental effects of coronavirus. 
    • Minimum credit score requirements have gone up.
    • Down payment percentages have gone up.
  • The constitutive elements of investing in real estate have all become more logistically challenging.
    • Home tours
    • Inspections 
    • Appraisals
  • People are struggling to make rent and loan payments.
    • In July of 2020
      • 32% of households were unable to make their full housing payments.
    • In August of 2020
      • 16% of U.S. adults who live in rental housing failed to make their full rental payments.
    • In September of 2020
      • 8.5% of renters missed, delayed, or made a reduced payment.
      • 7.1% of homeowners missed their loan payments.

Has the coronavirus pandemic made property prices go down?

You might think that no one would want to buy a house until coronavirus is fully taken care of. Afterall, the infection and death rates continue to rise in the United States. 

But in reality, single-family homes and residential housing prices are on the rise in many markets. Why?

  • Low inventory
  • Historically low mortgage rates
  • High demand

Of course, that’s not true of all real estate assets. Many types of investments are seeing a significant drop in price and demand.

  • Hotels
  • Retail space
  • Some office spaces

When coronavirus hit, there was significant worry that there would be depressed properties across the board because of

  • Widespread layoffs
  • Significantly reduced work hours
  • Sheltering in place
  • People relocating to new places ride out the pandemic

But measures were taken to stop a bad situation from getting worse. 

  • Quantitative easing (“printing money”), which is when a central bank buys long-term securities to get money into the economy to
    • Spur confidence
    • Encourage lending
    • Inspire investing
    • Increase spending
  • Additional unemployment benefits
  • Forbearance plans
  • Stimulus checks
  • Statewide eviction moratoriums like California AB3088
  • The CDC nationwide eviction moratorium
  • Other federal support

All of these measures, however, were temporary. As of now, there appears to be no new stimulus checks or additional unemployment benefits on the horizon. 

Additionally, eviction moratoriums are set to expire soon (California, February 1, 2021; CDC, December 31, 2020). If nothing is done, there will likely be significantly more distressed properties on the market because many people won’t be able to pay rent and landlords will have burned through their emergency savings.

Should I invest in real estate during the coronavirus pandemic?

Memories of the 2008 financial crisis may inspire some not to invest in real estate while coronavirus continues to be a national and global threat. 

Investing in real estate, however, is actually considered a safe alternative to investing in stocks during times of economic hardship. 

Property investment can produce stable income

Real estate may be less sensitive to volatility

  • Real estate has a low correlation relationship with the stock market.
  • There’s always a demand for housing, which means there’s always a market.
  • The estimated value of real estate may vary from year-to-year, but it doesn’t vary relative to the yearly income it generates as a rental property.

Property has the potential to outperform stocks and bonds

  • So long as your rental property is in a good neighborhood with good jobs, you are likely to ride out the recession. 

You can even invest in real estate during a recession if you were adversely affected by the recession. There are ways of investing in real estate with bad or no credit.

Bottom Line on Investing in Distressed Real Estate

As of right now, residential real estate prices are high in many markets due to increased demand and decreased supply. 

Given the temporary nature of the measures taken to keep residential homes from turning into distressed properties en masse, the real estate market may soon see many more distressed residential properties. 

Until then, investors can continue using tried and true strategies like BRRR, house flipping, and wholesaling. Additionally, investors can look into the distressed areas of the commercial real estate sector and approach illiquid investors who don’t have the resources to ride out the coronavirus pandemic.

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