The outlook for investment properties changed quickly during the coronavirus pandemic. Learn how to improve your future income prospects.
Investing in property can be an excellent way for a family to diversify their overall wealth but, like all investments, it comes with its own set of risks. The right property can generate a predictable stream of income for many years. But what happens if that income stream is suddenly interrupted or even eliminated all together?
In my experience there are several steps a family can take to minimize the impact of uncertain times.
As we’ve seen over the past year, the world can change very quickly. The COVID-19 pandemic impacted many tenants, putting stress on their ability to pay rent or, in some cases, stay in business. Properties that were once generating that predictable income stream coveted by all real estate investors were suddenly in distress.
Having advised clients through the Great Recession and now COVID-19, in my experience there are several steps a family can take to minimize the impact of uncertain times and to get a property back on track after the loss of a tenant or even several tenants.
Be prepared for the unexpected- There are a number of factors that can adversely impact the cash flow of a property. A tenant struggling to pay rent, vacant space, major repairs to the building are all variables that will impact a building at some point.
While it feels great to cash in rent checks every month, consider contributing to a reserve for the unexpected. Allocating even $.25-$.50 per square foot annually for capital expenses to such a reserve may not only help smooth out the cash flow of the property over the long term by providing access to capital to cover some of these costs, but it will make navigating these issues much less stressful.
Get to know your tenants- COVID-19 has changed the way many tenants view their leased space. Understanding your tenants’ business, financial stability, and space needs can help you anticipate issues that may impact your cash flow. Building a solid relationship can also make working through lease renewals and any other issues easier for both sides.
Engage the right team- Proactively engaging the right team of real estate professionals, such as asset managers and real estate brokers, can make a world of difference in resolving cash flow issues. Leveraging their professional experience, industry relationships, and resources to strategize on a plan, secure tenants, and oversee property improvement projects can improve your chances for success. It also may reduce your workload.
Consider investing in your property- When times are good and a property is fully occupied and generating an attractive return, investing in property improvements is not top of mind for most owners. However, in order to retain tenants and attract new ones, an owner should consider what improvements might benefit the property most in making it more competitive in the market.
Improvements could include adding tenant amenities, improving building technology, or a full lobby or exterior renovation. One of the areas where the right team of real estate professionals can add tremendous value is in determining what improvements, if any, might benefit your property and then helping you execute. We recently advised a client who purchased an underperforming office building on assembling the right local team and undertaking a series of exterior façade and lobby improvements that resulted in increased property cash flow.
Plan and be proactive
No one investing in real estate wants to see their cash flow reduced or even go to zero. By planning for the unexpected and proactively addressing tenant and building issues when they arise with the right team advising you along the way, you could be well on your way to keeping your property well leased and profitable over the long term. The good news is that you will be positioning yourself for a potential improvement in real estate conditions helped by a growing economy.