STRATEGY
CAPITAL
Talking Loudly: Navigating Through Turbulence WINNING IN REAL ESTATE WITH RISK MITIGATION
by Nathan Trunfio
Let’s go over a playbook for mitigating risk in these turbulent times.
ince COVID-19 has necessitated social distancing and closing non-essential businesses, it has slowed the economy and caused concern amongst Wall Street and the capital markets. Investment banks like Goldman Sachs have predicted the U.S. GDP will shrink by 34 percent in the second quarter. Now, major housing lenders have updated lending terms that reflect concern and risk mitigation. In April 2020, for instance, JPMorgan Chase raised mortgage borrowing standards. To qualify for a home loan, borrowers now need a credit score of at least 700 and a down payment of 20 percent or more. As you can see, the real estate landscape has changed, and the future is unpredictable. But this disruption doesn’t necessarily equate to destruction. You’re still in control. And you can still win. But you must mitigate risk going forward in this new norm. More than ever, now is the time for focused action. Given the uncertainty and panic that COVID-19 has created, it is imperative real estate investors are more conservative in their investment strategies and analysis. By focusing on what you can control, such as market research and finding the right lender, you can set yourself up for success over the short- and long-term. S
these types of assumptions. With the changes in the lending market, you must prepare by having additional capital. Because cash is king, it’s the best way to hedge against fluctuations that may impact an investment. Because home values and leverage are expected to be lower, you need to bring more to the table and have more in reserve in order to see a deal through from start to finish. Additionally, pay attention to the financial metrics. You have to avoid common mistakes, such as underestimating the renovation budget and assuming a higher-end home will fit into a lower-end neighborhood. Other common mistakes include: • Not having enough cash reserves (prioritize this!) • Spending all your money on the acquisition • Mis-analyzing your as-is and after repair values (this stems from trusting real estate brokers and wholesalers) • Only obtaining one bid for renovations • Expecting quick dispositions and few days-on-market • Underestimating the money needed to buy, re-position, and exit • Furthermore, focus on value
BUILDACONSERVATIVE CAPITALPLAN Each time I work with real estate entrepreneurs, I stress the need to plan for every phase of the investment. That’s because undercapitalization is one of the main reasons why deals fail. First, I advise investors to use conservative numbers when analyzing deals and developing their respective investment strategies, especially during times of uncertainty. You shouldn’t use the best sales comp, nor should you expect appreciation. It’s more likely you will experience a decrease in property values - both in its current state, and after any proposed renovations. Remember: We went into 2020 quite optimistic, with CoreLogic predicting a rise in home prices of 3.7 percent over the year. However, by early April, Bloomberg predicted a housing slump as a result of rising unemployment. And Veros Real Estate Solutions projected an appreciation rate of 1.9 percent through the first quarter of 2021—roughly 50 percent lower than original projections. To put it bluntly, don’t rely on the market to improve. We certainly hope it will rebound and that the impacts on housing values will be minimal, but this is not the time to look at deals with
66 | think realty magazine :: june 2020
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