Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to firstname.lastname@example.org.
Question from Michel from NYC: Hi Brian, I’ve been isolating now for several weeks. I’m a serious part-time residential real estate investor that sees opportunities passing me by because I haven’t gotten in on the ground floor as the real estate market changes fast. My preferred investment strategy has been turnkey rentals in the Midwest. I’ve had the time to keep up on investing news but to say the least it’s confusing. Some information indicates the markets are going to tank and there will be a lot of distressed properties for sale. This is the niche that I’m interested in. I know that some people think this is a vulture attitude but my mindset it that I can help people out of difficult situations. On the other hand, there are people that believe this situation is very temporary. That between the eviction and foreclosure moratoriums and the stimulus money that the market will remain stable. Still others are describing it as a short window of opportunity for investors but that in a few months it will again be a seller’s market. I guess it’s that short window that I don’t want to miss out on. What’s your latest take on the residential market?
Answer: Hi Michel. Some people are describing the investing situation related to the COVID-19 pandemic as fluid. If you stay fully connected to the real world, it’s more like trying to understand information coming at you through a firehose. Slowww… down. We know a few things that have already changed and can be expected to remain stable for at least the next six months or so. We also know there are still many unknowns. Still, we are at least starting to understand what we don’t yet know. What we do know is that interest rates have gone down to levels that no one expected but we can now expect them to remain ultra-low for many months to come. We also know that big players in the real estate financing world (Fannie and Freddie) did continue underwriting mortgages during the Great Recession. The conclusion is that financing at very low rates is going to be available for the foreseeable future. That will remain good for investors. We also know that almost every state either had or now has electronic methods for completing key parts of real estate transactions. Everything from virtual house tours to electronic closings. Fannie and Freddie have even loosened the appraisal requirements to allow some electronic analysis rather than requiring a home visit. Michel, all of this should work well for you since your investment strategy is outside of your physical location.
But there is still plenty that we don’t know. That is why you want to take a little more time before over committing. Probably the biggest unknown is how long large numbers of people will remain unemployed and if most of them will have jobs to go back to as the economy reopens.
Something else we know is that spring is the busiest season for residential sales but it has slowed almost to a halt this year. What we don’t know is if there will be a resurgence in buyer demand and if sellers will put houses back on the market that they have taken off the market. The return of buyer demand will be closely tied to what happens with employment numbers. If the sellers’ market quickly rebounds, the investment opportunities won’t change much from what they were before - retail buyers will again limit the number of distressed properties that investors are looking for. Michel, this could create the short window in the market where you want to jump in. This is the risk and reward question that investors face right now. If the market rebounds quickly, investments made during the short dip will likely have solid returns both as rentals and for resale. If the market dip becomes longer term, resale values will likely plateau or even begin a downward trajectory. The same could happen with rents. Right now, the unemployment numbers are staggering. If unemployment remains high, rental vacancies will go up and incremental rent increases will stagnate.
We’ll likely see the employment picture more clearly in the next few weeks but the concern goes deeper than just a return to employment. First, all indications are that the reopening of the economy will be in phases. That probably means people will return to work in phases. Also, people will have been without paychecks for a couple of months or longer. Many potential buyers have likely resorted to raiding their down payment funds to make ends meet. But the unemployment benefits have been significantly boosted to make people whole. Whether or not the money actually gets to people’s bank accounts in the next two weeks will have a big impact on how fast the buyer demand for houses returns. The other piece of this puzzle is what happens with the next stimulus package coming from Congress. If there is more unemployment relief and mortgage relief, it could revitalize the seller’s market a few short months from now.
On the seller’s side, the ultra-low interest rates are creating another round of refinancing. With 30-year mortgage rates near the mid-3% range, more owners have reason to refinance. With 15-year mortgages below 3%, some owners will decide to shorten the length of their mortgage. These owners will stay in their homes and if buyer demand returns it will be to an even smaller market than before.
Michel, as you noted, the situation is confusing. However, useful information is becoming clearer. Investing certainly has not come to a stop and there are processes in place that work even if you are staying home. The decision each investor needs to make first is whether he or she has enough reliable information to move forward now or if they prefer waiting for more clarity. I hope this helps at least a little.
Please comment about what you expect to change for investors in this real estate market. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to email@example.com.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.
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