Round-Up Of The Top Tips For New Active and Passive Investors In A COVID Impacted Economy
It’s been almost 3 months since the novel coronavirus COVID-19 hit the US causing major shock to the health and economic infrastructure of the US. In response to this virus cities turned to lock downs and real estate investors, both active and passive, were left in a space of uncertainty trying to identify the correct moves to make next. As many cities have already emerged from lock-downs and begun identifying what life would look like as a “new normal” there is more clarity for investors on how to move forward. While no one can predict the future, we can use historical experiences and the current facts that we know to make the most informed decisions.
If you are a new passive or active investor that recently started investing in real estate or are thinking about investing in real estate, then you may be wondering “what do I do now?” In the face of uncertainty insights from experienced investors can provide the guidance needed to move from a place of being “stuck” to a state of taking action.
To help in navigating what comes next after COVID-19, we rounded up the top tips for new active and passive investors from some of our previous guest speakers.
Rob Beardsley – Lone Star Capital, Multifamily Syndicator and Author, www.lonestarcapgroup.com
The current real estate market is extremely uncertain, characterized by less activity. As a new investor, this next period will be difficult to raise capital in (it is always difficult!) and harder to obtain financing but prices should adjust to make for some better opportunities. I think an important thing to do is to understand your return criteria/cost of capital and focus on finding good basis buys. Don’t wait to buy if you think prices are going to keep going lower. Buy if the returns meet your criteria and focus on managing your assets and don’t worry about mark-to-market losses (value of your property going down while you work to increase cash flow).
A passive investor with liquidity to invest in today’s environment is extremely lucky. Currently, the best value is in acquiring performing and non-performing loans, but this is a more difficult asset class to access, especially on a deal by deal basis. Passive investors should understand that some deals purchased today are going to be longer term holds due to the uncertain future of supply/demand fundamentals and capital markets. Similarly, for sponsors or active investors, if you see an opportunity that meets your return criteria, take advantage of it now, rather than wait for potentially lower prices.
To learn more about evaluating multifamily syndication investment opportunities, especially in this current market, check out Rob Beardsley's book "The Definitive Guide to Underwriting Multifamily Acquisitions: Develop the skills to confidently analyze and invest in multifamily real estate."
Matt Faircloth – DeRosa Group, Multifamily Syndicator and Author, www.DeRosaGroup.com
Today's marketplace has changed so much lately. The rules have changed for both passive and active investors, or as I refer to them in my book Raising Private Capital, Cash Providers and Deal Providers.
For the Deal Provider, it's all about underwriting the deal and financing. For underwriting, you need to consider all the factors that are in play now. We can't just assume a 5% vacancy rate is acceptable. Vacancy and delinquency will be higher, and rents may take a dip also. Factoring in some conservative elements are key to the Deal Provider. For financing, you will either need to find a bank that will lend in today's market or rely completely on creative financing to get your deal closed. For the Deal Provider, it's all about the DEAL.
The Cash Provider faces a completely different problem. There are plenty of Deal Providers out there looking for lenders and investors, and some know how to navigate this new market and others don't. For the Cash Provider, it's all about choosing the right Deal Provider partner. The Cash Provider should be asking about the Deal Provider's length of time in the business, which markets they focus on, what their track record looks like, and if they've ever seen a full market cycle. For the Cash Provider, it's all about the DEAL PROVIDER.
Ted Lanzaro, CPA - Lanzaro CPA – Tax Accountant for Real Estate Investors, Real Estate Investor and Author, www.lanzarocpa.com
Current advice for new active investors in the current real estate market:
My advice would be to be patient! There are opportunities coming especially with landlords feeling the pain of collection issues caused by Covid-19. You will begin to see prices for residential and commercial properties coming down. At that point, it’s time to buy as much as you can without overleveraging. Cash reserves will become a must-have and I would advise a minimum of six months mortgage payments in the bank for each property you own.
Current advice for new passive investors in the current real estate market:
Due diligence on syndication operators will be a must-do. Review financial information on all properties currently owned by operators to see how well they are doing managing the current crisis. Run from any investors who only tell you about their successes. The good ones will also tell you about their failures and what they learned from them.
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