The effects of the COVID-19 pandemic and the ongoing global ramifications of the war in Ukraine have left us stranded with rising gas prices, inflation, and what many believe to be an impending recession. For the real estate market, in particular, landlords have remained between a rock and a hard place, unable to evict unpaying tenants and, consequently, unable to pay their own bills. Amid such cause for concern, one may wonder what landlords can and should do in the current real estate market and wounded economy. Thankfully, despite dire trends, today’s real estate market appears beneficial to the strategic landlord.
Lingering Pandemic Problems. To understand real estate as a business in today’s market, one must first note the extent to which the pandemic continues to shape it. Many landlords have gone 1.5 or more years without payment from their tenants due to state and federal eviction moratoria. About 6.5 million American tenants owed $27.5 billion back in rent and utilities in the immediate aftermath of the national eviction bans. Though Congress approved $46 billion for them months ago, landlords across the country have been waiting anxiously for funds to help them survive without sufficient income. Unfortunately, bureaucratic blocks have only allowed $3 billion to filter through thus far.
Aside from revenue concerns, landlords are facing a big challenge from big investors. During the pandemic, institutional investors—firms owning more than 1,000 units—have been buying properties in bulk, claiming to provide long-term stability to the market and fill the gap in rental properties needed as small landlords exit due to financial troubles. Untamable debt and legal constraints make the institutional investors’ often all-cash offers fairly difficult for landlords to refuse. The first half of 2021 saw $77 billion in institutional money enter the real estate home market. In addition to a lack of inventory and low-interest rates, increased institutional investors in the market have contributed to the displacement of small landlords and a rise in rent (7% increase, 2020-2021) and home prices (16.6% increase, 2020-2021). Despite the potential threat to smaller landlords, the presence of institutional investors is boosting opportunities for investment and growth in the real estate market, ones that current or incoming landlords should take advantage of.
The Landlord’s Market. The state of the economy has understandably scared many Americans in recent months. While there is definite cause for fear for consumers and businesspeople alike, the business of real estate today is actually quite fruitful. Due to the projected increase in profitability, real estate investors and the general investment community are turning their attention to the rental market—especially to single-family and multi-family properties. Size, funding, demand for advances in software technology, and investment opportunities in the real estate market are all growing. The average apartment renter is now earning $70,000 per year, and the wages of renters are rising strongly (about 3.3%). Importantly, there is a great transition back to the city; apartments are filling up in urban areas, the demand in pandemic destination cities is remaining healthy, and work from home is expected to be continuous.
The opportunity to take advantage of the market is now. Landlords in the contemporary real estate market, as long as they use technology to service accounts and seek areas with the best rent yields, are setting themselves up to thrive. Inflation is a beast that may be deleterious for the budgets of property managers and HOA managers, but as long as one can successfully navigate the market in their best interest, they can make a good profit.
Proceeding With Caution. Though the forecast is looking relatively good for landlords, there are a handful of issues that they will need to address as they proceed in the current real estate market:
- Lack of Supply: Demand is high for certain properties but the market is grossly undersupplied. While this disparity between supply and demand is beneficial to landlords in that rent (approaching 15%) and home prices are on the rise, competition between landlords is heightened and non-institutional investors in the market must play their cards right to cater to their consumers.
- Shortages: To fill the shortage in supply, more homes and rental properties must be built amid the current shortage of land, materials, and laborers.
- Building Constraints: Building more homes and rental properties could be further discouraged by construction costs, rising taxes, and housing regulations.
- Slow Recovery: Multi-family and apartment sectors were hit hard during the recession and are just now beginning to fill vacancies created by the pandemic.
- The Consumer: The rising rent and home prices, as well as homelessness, at a certain point, could really harm the market by limiting the number of consumers who can rent and buy properties. Without a means of maintaining and fulfilling demand, high rent and home prices cease to be very beneficial to businesspeople in the real estate market. The market requires some balance between profitability and affordability in order to remain stable.
Recommendations for 2023. CCSK Law has a set of recommendations for landlords to successfully take on present opportunities in the real estate market and mitigate myriad challenges to them:
- Flexibility & Adaptability: The most successful landlords in today’s real estate market will be flexible and adaptable. The trends will continue to change as the persisting pandemic as well as global issues, such as the war in Ukraine, impact the economy. What landlords can control best as they navigate these unsteady and unpredictable waters is to be consistent in their daily property management: maintenance, bookkeeping, tenant management, keeping their budget, etc.
- Utilize Technology: The landlords that drown are the ones who resist changes in technology and its increased use in the real estate business. The market is migrating from old software solutions to more modern platforms. Those who educate themselves on new technologies and apply them to their business activities will do well in today’s market.
- Secure Tenant Screening Process: Finding reliable tenants who can pay their rent is critical for landlords. The screening process should check for monthly income, employment stability, bill payment history, credit checks, financial habits, previous landlords’ opinions (if applicable), their employers’ opinions, etc. Evictions, even when possible, are costly, so securing reliable tenants from the beginning is highly recommended.
- Adjust Your Rent Prices: Rent prices are rising; match the rise.
- Complete Repairs: This will help secure tenants and maintain satisfaction.
- Buy or Develop More Properties: The time for investment is now.
Ultimately, doing business in the real estate market today can prove harmful or helpful. Landlords can ensure a good chance at success and security if they stay on top of the trends, adapt to changes as needed, look for and take on opportunities with some caution, and secure their business and management of tenants during the process. Regardless of what today’s market conditions are, CCSK Law is here to provide assistance and counsel as you pursue business in real estate. Give us a call at (219) 230-3600 for a free conversation.
About the author
Isaac Isaiah Carr, JD MBA is founder, CEO, and business attorney of CCSK Law, a kingdom-driven law firm. Launched 5 years ago, CCSK Law grew from a single member firm to a 10 person team. His areas of focus include business formation and strategy, contract writing, sales, and corporate finance. Often referred to as an entrepreneur with a law degree, Isaac is able to offer business strategy utilizing creative solutions guided by legal and accounting principles that are then well executed in law. Experience in a variety of industries including real estate, hospitality, automotive, e-commerce, professional services, and healthcare. Successfully negotiated and closed multi-million-dollar transactions, ranging from $1.8M to $10M, with private investors, corporate leaders, and municipalities. Ultimately, he builds sustainable structures for systematic growth. Graduated from Valparaiso University Law School summa cum laude with his Juris Doctorate as well as the AACSB-accredited Valparaiso University School of Business with his Master’s in Business Administration. Passionate about education in all forms, Isaac is involved in the nonprofit organizations of SCORE, Neighbors’ Educational Opportunities (NEO) and New Vistas High School, ValpoNext, and Music Neighbors.