[REN #882] U.S. Economy: Discounted Real Estate for Investors

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U.S. Economy: Discounted Real Estate for Investors, Real Estate News for Investors Podcast Episode #822

The Federal government is pumping trillions of dollars into the U.S. economy to offset damage from the coronavirus pandemic. But, as businesses remain closed and much of the U.S. workforce unemployed, we will likely see some amount of damage — including the sale of distressed properties. While that’s never a good thing for the seller, it creates a potential buying opportunity for the real estate investor.

The Wall Street Journal reports that a number of institutional investors are sitting on piles of cash for what could be a once-in-a-generation opportunity to buy properties at a big discount. (1) Among those firms are Blackstone, Brookfield Asset Management and Starwood Capital. They’re monitoring the situation from the sidelines, and checking on the status of properties and other assets like mortgage-backed securities.

Real Estate Investors Poised to Buy

Co-founder of investment firm BH3, Daniel Lebensohn, told the Journal, “There are people that do have dry powder, like us, and they will recognize this as one of the greatest buying opportunities of the century.” But the good news isn’t just the buying opportunity. It’s also sales activity that will contribute to the economic recovery.

We haven’t seen much sales activity yet, or mortgage defaults. But some investors expect they may be coming our way. As the Journal reports, mortgage-backed securities have been the first to show signs of distress. They are held by real estate investment trusts and are dealing with margin calls from the banks right now, due to the decreased value of the securities.

Billionaire investor Sam Zell has described himself as a “professional opportunist” and has made much of his money buying real estate at a discount. The Real Deal reports that he’s sold a lot of properties over the last few years from his real estate investment trust, and is ready to pounce on any new deals. (2)

Diversification

Scale that strategy down to the level of mom and pop investors, and you may find a sweet deal or two for your own portfolio. Real estate offers a diversification from a more volatile stock portfolio, and if you buy the right property, you can generate some income. 

So why should you buy real estate right now? If we see a drop in home values, you’ll be able to buy a property at a lower price point, with a low mortgage rate, and rent it out while you wait for the value to recover.

Whether you buy now or later, real estate will provide you with financial stability. Yahoo Finance listed three good reasons to diversify your holdings into real estate. (3)

1 – Passive Income

Real estate can provide a more stable source of passive income. REITs will earn you dividends while investment property can generate rental income. During a recession, this income will also be more predictable. No matter what happens, renters will need a place to live. Jason Laux says, “Their monthly rent payment is always due and is not tied to the stock market.” Landlords can also protect themselves against inflation by raising the rent at lease renewals.

2 – Less Volatility

Real estate values are not as volatile as stock prices. During the Great Recession, home values dropped significantly in some markets, but Quinn Palomino of global equity firm Virtua Partners says, “Single-family rental assets were actually positive as a sector.” He also says that other assets like storage and multifamily are usually more stable during a downturn.

3 – Long-Term Performance

Real estate may outperform stocks and bonds over the long term. As Laux says in the Yahoo blog, “You have to be comfortable with the long-term nature of this investment.” Palomino also warns that an investor’s success during a recession will depend on the strategy. He says a recession isn’t the time to look for appreciation or high cash-on-cash returns, but rather a sweet spot in the middle. It’s also important to buy in a good neighborhood with a strong job market.

Buy-and-Hold Single-Family Rentals

The take-away from this is that buy-and-hold single-family rentals can help you weather a recession. If you would like to learn more about how to invest in real estate, you’ll find free educational materials at our website. You’ll also get data on the metro areas that are the most landlord friendly and the most recession resistant. At RealWealth, we are hosting daily webinars with property managers around the country to get real time boots-on-the-street information on which areas are performing the best through this. We’ve found some metros are actually receiving a record number of quality rental applications, as more people move into single family homes in order to have more space and a back yard.

Links:

(1) The Wall Street Journal Article

(2) The Real Deal Article

(3) Yahoo Finance Article

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