Real estate can be a fluid industry that adapts and evolves quickly. However, there will always be a handful of problems in such a dynamic sector that investors have to navigate. The challenges that investors face in the real estate market can impact their business significantly.
With uncertainty in other sectors of the economy, dealing with these challenges is at the top of most investors’ list of priorities. What are these impactful hurdles that real estate investors need to jump? Here, 16 members of Forbes Real Estate Council weigh in on the challenges investors typically face and how to deal with them in the coming year.
Members of Forbes Real Estate Council detail challenges investors are facing and tips for overcoming those hurdles.
Photos courtesy of the individual members.
1. Market Volatility
One challenge to investors in the current market is volatility. There are tremendous opportunities but the uncertainty of the global pandemic and geopolitics makes this a difficult period for investors. How this can be addressed depends on an investor’s strategy. Long-term investors may want to avoid jumping into hot areas, sticking instead to stable investments that can weather the storm. – Craig Romm, Prime Manhattan
2. Increased Liability
Liability is increasing quickly for investors operating their own rental portfolio. It appears almost daily that there is a new regulation being mandated to operators or property managers. Investors would be wise to work out a deal with a professional property manager to limit the liabilities that government intervention is swiftly creating. – Kyle Karker, American Real PM
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3. Limited Inventory
A major challenge will be limited inventory. In November, the number of active home listings was down 39.2% and sales were up nearly 26% compared to November 2019, which makes for a very competitive market. It is hard for investors to find properties where the numbers work. It is even more vital right now for an investor to be working with a real estate broker who will provide them with off-market listings. – Kristee Leonard, The Leaders Realty, LLC
4. Income Uncertainty
The one challenge that investors face is income surety. Everything should be considered new. The economic position of many companies will not be as before. You must investigate your tenant with care since they are the value you seek. Check the tenants out fully to make sure you are getting solid income streams. – Michael J. Polk, Polk Properties / Matrix Properties
5. Cap Rate Compression
Capitalization rate compression combined with the uncertainty of the Covid-19 on operating income for assets is making investors squirmish. As an investor, this is the time to review your fundamentals and understand the opportunity cost of investing in deals that don’t make sense for you. Understand who, what and where you’re investing in. Ensure the operator has stress-tested their business plan. – Andrew Schena, Capital Equity Partners, LLC
6. Deal Underwriting
Deal underwriting has significantly changed; forward-looking assumptions regarding bad debt, delinquencies, concessions, vacancy, rent growth, etc. all impact returns and yields. It is challenging to predict how a property will perform in the next 12-18 months. In this case, worst-case scenario underwriting is advisable. For example, 0% rent growth during the first six to 12 months of ownership. – Ellie Perlman, Blue Lake Capital LLC
7. Low Rental, Occupancy Rates
In tourism markets like mine in Mexico, investors are challenged by poor short-term prospects in rental rates and occupancy until the pandemic is under control. I address this by educating them about the long-term prospects of historic property appreciation. This more than compensates for the short-term drop in ROI and gives a much better internal rate of return on a long-term hold. – Gregory Gunter, Berkshire Hathaway HomeServices Colonial Homes San Miguel
8. Evictions Of Delinquent Tenants
Current landlords with limited capital are facing the challenge of evicting delinquent tenants and deciding to forego or accept government stipends with many strings attached. Furthermore, investors looking to acquire those same properties from tired landlords are faced with navigating legal and affordable solutions regarding evictions, restrictions and possible eviction moratorium extensions. – Tracy Royce, Royce of Real Estate
9. Sudden Changes In Loan Quotes
A great challenge would be the sudden changes in loan quotes/process resulting from perceived market instability due to Covid. Address this by working with a knowledgeable mortgage broker who specializes in your product type so that if your chosen lender surprises you, a replacement can be called from the bullpen. – Lee Kiser, Kiser Group
10. Quickly Securing Funding
Securing funding fast when you find a deal is a great challenge. Investors need a solid source of funding that comes with a lower interest rate rather than a hard money lender. I have had great success with cultivating relationships with people who have a self-directed IRA and are looking for good returns backed by real estate investments as these SDIRA account holders make great private money lenders. – Nancy Wallace- Laabs, Profitable Landlord System
11. Growing Use Of iBuyers
Right now, iBuyers are a big competitor for many markets in the U.S. As a real estate investor, it’s more important now than ever to be completely transparent with your seller so they know exactly what your offer is and that there won’t be any hidden fees or deductions from your offer (as long as that is true). – Mike Hambright, FlipNerd.com
12. Building An Online Presence
Networking and usual meetups are gone. The key is to embrace technology and start working on your online presence. Even one channel (Facebook, Linkedin, Instagram, YouTube, etc.) is good enough to get started. Pick your channel. – Chander Mishra, Accel Equity Group LLC
13. Hyper Inflation On Assets
Right now, investors may be struggling to stay ahead of buyer competition driving prices up while also navigating limited inventory. The pandemic and economic struggles have also resulted in hyper inflation on assets, including property, making cash flow harder to calculate. Investors are now weighing the balance between purchasing property for appreciation versus cash flow. – Jennifer Anderson, Anderson Coastal Group
14. Huge Gap Between Bid And Ask
A major challenge is the huge gap between the bid and ask. Generally speaking, commercial real estate buyers want a 30% discount where commercial real estate sellers are only prepared to offer a 5% discount. While property type and location sway discounts, a price decrease is generally more in support of the seller’s position than the buyer’s. Industrial and multifamily are doing the best while retail and hospitality are doing the worst. – Richard Lackey, City Commercial Real Estate, Inc.
15. Directing Capital Into Green Infrastructure
A current challenge is how to direct capital into green infrastructure and smart cities. Thanks to rising interest in socially aware assets, there is huge demand and a growing number of projects to invest in. A consortium approach is one way to bring private stakeholders together to create a single, centralized source of funding for U.S. projects, as is the norm in other areas of the world. – Danny Hayes, TerraScale