Real estate is historically a stable, reliable long-term investment with added potential to generate a steady stream of income. However, the coronavirus pandemic has disrupted real estate values and returns — more drastically, in certain respects, than the downturns we’ve seen in the stock market and other investment categories. But the short-term effects don’t cancel out the long-term value of maintaining property within your investment portfolio.
COVID-19’s sudden economic impact—from shuttered businesses to widespread unemployment—has landed especially hard on property owners who rely on rental or lease income. While the federal government and many states have stepped in to provide economic relief and forestall eviction for tenants who can’t afford to make payments amid the pandemic, landlords are contending with the ripple effects of lost revenue and declining market prices.
With no clear-cut end to this crisis in sight, many investors with real estate in their portfolios are pondering whether to sell those assets, borrow against them, or pursue another means of filling the income gap. As is true for any significant wealth management decision, I recommend working closely with a trusted financial advisor to map out a plan that aligns with your specific situation and long-term goals.
As a starting point, here are some key considerations and potential options for weathering the current downturn without having to liquidate real estate assets that may still merit a place in your overall investment strategy.
Despite the short-term impacts of COVID-19, real estate ownership still makes sense as part of a diversified investment portfolio. Like any other growth-oriented asset, it also carries a degree of risk. Bear in mind that real estate is not liquid. Thus, you should approach it as a long-term, buy-and-hold investment asset.
Current market conditions have not altered the basic tenets of real estate. What has changed is that almost all parts of the market are feeling the pain of the coronavirus pandemic. If you can afford to ride out this temporary crisis—and most forecasts are linking sustained economic recovery to the release of a coronavirus vaccine sometime in 2021—the returns on your real estate investments are highly likely to rebound.
But what about investors who had been relying on now-interrupted lease or rental income to meet their financial needs over the next six to 18 months? There are options to help tide you over during the pandemic.
As an advisor, I first look at my clients’ cash flow in terms of how much monthly income is essential to their desired lifestyle vs. how much is desirable. Understanding the difference between what’s needed and what’s nice to have will help shrink the actual income gap that you are facing.
Next, consider drawing on the most liquid assets in your portfolio to fill that gap. These could include:
As a last resort before selling real estate, you might also consider borrowing from your retirement funds. As part of the federal CARES Act relief package, Congress has allowed people below retirement age to take a distribution of up to $100,000 from a qualifying IRA plan without incurring the usual 10% early-withdrawal penalty. The distributed funds will be exempt from mandatory tax withholding, which is normally 20 percent. The penalty and withholding waivers apply to withdrawals made between January 1 and September 23, 2020. Borrowing funds from your retirement account is a last resort, as we mentioned, and only recommended due to the exemption of fees during 2020. However, removing finds from your retirement account earlier than expected can impact your overall retirement goals, so it would be important for you to discuss your options with your advisor to see if this is the most appropriate route for you.
Plan your alternative methods of cash flow with your advisor, who can provide objective input and potentially help you overcome a knee-jerk reaction to jettison those real estate holdings that are temporarily unprofitable.
Although your current commercial and residential tenants might not be making payments now, remember that they will still need places to live and do business once the economy gets back on track. In the meantime, you may have other means of helping maintain a profitable relationship with your dependable tenants.
Consider the following options:
If you are invested in private equity real estate that has made a cash call, then you will want to do an in-depth review of the investment, including the cost to you to add funds, and determine if it is something you can and should do. It is important to speak with your advisor to determine the impact on your overall portfolio if you do want to add funds. However, now is probably not the time to enter into a new private equity real estate deal that may require cash calls.
Going through these steps should allow you to look at the situation objectively and stay true to your long-term goals.
COVID-19 sent financial markets on a wild ride in the first half of 2020, and the real estate sector did not escape the effects. But this crisis will not last forever. When considering options for your real estate investments, revisit why you bought the property and whether those objectives still feel valid. If so, then do not let a short-term income pinch send you into a panic. Many investments outside of real estate have also dropped in value. So, the real question is: Will the income from your holdings return once this current downturn is over?
Making short-term decisions about real estate is rarely in your best interest. Your real estate investments took time and forethought to accumulate; take that same approach when weighing your decision to stay the course or sell.
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