Much has been written about the Covid-19 pandemic and its effects on the economy. We all know how it has ravaged the hospitality and restaurant industries. It’s gutted small businesses and forced employees onto unemployment, even though they would rather be working. But how is all this affecting the real estate investment market? Even if you’re not in the market to buy or sell right now, what are the long term effects you should look out for?
Investment real estate’s value derives from its cash flow. If the cash flow is disrupted, so is the value. It doesn’t matter if you own an industrial complex, small strip center or multi-unit apartment building. If the tenants are suffering and cannot pay the rent, in full or in part, then cash flow has declined. Yes, banks are working closely with property owners and making deals to allow for reduced payments or in some cases the payments are deferred altogether in order to prevent the owner from defaulting. But the other expenses of a property, such as real estate taxes, insurance and maintenance costs, continue to accrue. We’re all scraping by, barely, but everyone from tenants to property owners to the financial institutions are holding out for the time when we return to “normal.”
However, here is the hangover no one is talking about. The decline in cash flow, even though it may have only been for a few months, will have lasting ramifications on value as well as purchase power. When buying or selling, banks ask for the previous 3 years’ worth of tax returns and financial information. The Covid related issues of 2020 won’t be out of the rear view mirror until sometime in 2024, if we’re lucky. It doesn’t matter if you are the tenant who got “relief” on his rent, the landlord who reduced rents and asked for a deferment on your mortgage, or the investor trying to leverage your property to buy additional investments. When the stain of your 2020 return is unveiled it will hamper your ability to sell or buy at current market conditions.
Unfortunately there are many who are in this predicament and there’s not a lot you can do. You aren’t going to report and pay taxes on income you didn’t collect, nor will you under report expenses to make cash flow look strong. But you should be aware of the issue and monitor it with your financial advisor or accountant. Hopefully there will be a collective understanding by bank underwriters that 2020 was a dumpster fire for everyone and the results of it should be only lightly considered. That would be much more helpful than thousands in stimulus dollars which, like a sugar rush, give immediate results but wear off quickly and do not help in the long term. Time will tell.
