Risk Mitigation and Due Diligence in the Pandemic
What Investors Must Do to Ensure Favorable Outcomes and Future Earnings
by Erika Garcia
It is vital to fully understand the risks and rewards of real estate investment during our current economic decline caused by the coronavirus pandemic. Investing in real estate can provide the potential for a stable income stream and value appreciation, along with generous tax benefits. However, real estate investors must recognize that the pandemic may impact where people work, spend their money, and the location they choose to live.
The pandemic has impacted investment property types differently. Commercial properties such as hotels, restaurants, gyms, etc., have taken the bulk of the hit. At the same time, residential properties are now more in demand than before the pandemic. Due to the coronavirus, renters in high-rise condominiums started looking toward renting single-family homes. This is clearly fueled by people wanting to remove themselves from the overly crowded markets and living conditions. The coronavirus has led society to yearn for more private outdoor spaces, distance between household members, and more room for all to enjoy and feel comfortable amidst this pandemic, thus creating an increase in demand for single-family rentals.
Increased Demand for SFR Inventory
Even though the SFR market was strong before the coronavirus pandemic, it seems the demand for inventory has only grown stronger. The increased demand for SFR’s persists due to the lack of new single-family rentals and a decrease in rental turnover. So, to meet demand, investors must remain steadfast in their due diligence efforts and avoid the allure of quick turnaround and shortsighted due diligence. While the need for standard procedures and reviews are necessary to ensure the right fit, price, and returns, today’s market, one fueled by the coronavirus pandemic, requires a due diligence process that may look and feel a bit different.
Due diligence requires investors to look at:
- Strong Population in Migration
- Low Unemployment Rate
- Hybrid of Physical and Virtual Site Visits
- Comprehensive Inspections and Appraisals While Maintaining Mandated Health and Safety Precautions
Alongside these tried-and-true guidelines, there are several other factors investors must look into and investigate to ensure favorable outcomes and future earnings. Today’s markets see potential buyers and renters moving all over the country for various reasons. The new “remote working” or “hybrid” work approach has changed people’s approach on managing their day-to-day lives. This, in turn, changes where people live and how they live. Factors such as unemployment, rentability, population density, demographics, and their purchase/rent buying power must be viewed through today’s lens and are crucial to making great real estate investments. These will be vital factors in the future of single-family rentals and other investment properties.
As the pandemic continues to have a significant impact on the economy, real estate investors are challenged with navigating the effects of portfolio performance. It is increasingly essential to ensure that portfolios yield the most significant possible results by invigorating portfolios with newly vetted real estate investment and placing greater emphasis on the risks of those portfolios given the current landscape.
Four main categories are crucial to risk mitigation.
- Diversification by Asset Type
- Diversification by Geography
- Avoidance of High Rent Asset Types
- Tax Benefits of Real Estate Investing
Diversify by Asset Type
Diversification of their real estate portfolios by asset type will help avoid the risk of over-concentration in one particular category of property.
Diversify by Geography
Diversification of their real estate portfolios across different cities and states will alleviate the risk of over-concentration in a particular market. Specifically, keeping an eye out for cities and states with lower unemployment levels.
Avoid High Rent Asset Types
The real estate market is continually changing. As we see today, any pandemic, economic circumstance, financial condition, and supply and demand will all impact the capability of profit of a real estate investment at a given time. Keeping an eye out on market rent and staying within the “affordable” range would be vital in avoiding high turnover or vacant properties.
Tax Benefits of Real Estate Investing
Real estate is one of the most tax-advantaged types of investment in the US. Deductions for depreciation are available to all investors. Moreover, some direct real estate investments may qualify for like-kind exchange treatment, known as 1031 Exchange. This can save investors up to 40% on their tax bills when net gains are on property sales.
Now more than ever, investors must look for new and innovative ways to build diverse and profitable portfolios. Through the uncertainty of the coronavirus pandemic, the impact on different real estate asset types is unknown. It can be essential to enlist the services of professional real estate asset managers who can help develop defensive market strategies aimed at preserving cash flow while positioning assets and portfolios for future market opportunities.
