Real estate continues to be a safe haven investment in 2020
As more investors continue to exit the stock market, the real estate market continues to be one of the safest markets for investment in 2020. Why? Real estate offers stability, consistent profits and long term growth.
How to Not Lose Money in Real Estate
Moderate, Long-Term Leverage
Putting high leverage on a deal is the fastest way to lose your money. In a situation where market values are impaired and you have an otherwise appealing asset, your main risk will come when refinancing the loan.
If you start at an 80 percent LTV, it doesn’t take much in the way of rent declines or cap rate increases to put you in a position where you’ll soon be giving the keys to the bank. Resist the urge to use short-term debt at high leverage points.
A widow-maker is a real estate deal where there is a component of the deal that can completely wipe you out. An example here would be a high-cap rate, retail net lease deal. It may provide great cash flow for a few years, but if you lose the tenant, the likelihood that you can replace the rents, especially without paying through the nose for tenant improvement (TI), is very low.
This kind of deal can wipe you out. You’re counting on one event—a lease renewal—to make or break the investment.
Investing in high-quality residential or commercial real estate locations with a bright future is even more important than usual right now. Any buildings that feel an outsized negative impact will be the marginal ones.
A well-located apartment building near employment centers, transportation networks, and entertainment options will likely suffer far less than their less optimal competitors.
But What About a Recession?
Before the coronavirus scare, my opinion on the matter was that the economy seemed vulnerable to a recession, but my base case was that 2020 would continue to show modest growth.
Now it looks like there is a high probability that we slip into a recession.
The question becomes, how good will the containment efforts be, and how quickly will people regain their confidence to go to work, shop, and attend events?
I’m not an epidemiologist. There seems to be conflicting projections and beliefs even among experts. The important thing is how people react and the economic decisions they make. On that front, it looks likely that an already fragile economy is going to tip into recession.
At this point, there are simply more questions than answers on that front. I certainly hope that this is short-lived.
Source – Bigger Pockets
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