An Exit Strategy for Underperforming Investments Amid Covid-19 Eviction Moratoriums - 1031DST.com

On March 11, 2020, the National Basketball Association (NBA) announced the suspension of the 2019–20 season following positive COVID-19 tests. At the time, it seemed drastic. Yet shortly thereafter, the dam broke. States entered quarantine, businesses closed, and millions lost their jobs. Since those first positive tests, we’ve seen drastic changes in the world as we know it. Real estate has not been immune to those changes.

Covid-19 Eviction Moratoriums

The current real estate environment includes a new wrinkle for the residential real estate investor – eviction forbearance. Both federal and state mandates have put a temporary hold on evictions for nonpayment of rent. As recently as September 4th, the CDC doubled down, extending the moratorium nationally until the end of the year. For many tenants experiencing hardship and unable to pay, that forbearance is welcome relief. To a tenant with no job, no prospects, and no extended family, an eviction could be detrimental to survival. However, for others - the unscrupulous and the opportunistic – the eviction moratorium is an opportunity for a free ride.

The CDC’s ruling states that tenants cannot be evicted for nonpayment of rent. The writing of the rules appears to state that tenants need only to sign an affidavit stating they can’t work, make money, or that they will become homeless if evicted. It is not immediately clear if landlords have the right to request documentation of hardship.

Impact on Landlords

Understandably, the CDC is prioritizing health and safety before considering a landlord’s bottom line. However, landlords also face hardship. Nonpayment of rent means residential landlords may not be able to service their mortgages or pay maintenance expenses. While mortgage forbearance has been granted for certain types of debt, it doesn’t cover all residential investment properties. Forbearance also doesn’t forgive those missed payments; it merely defers them to a later date. Stuck between tenants unable or unwilling to pay and banks that still expect mortgage payments, real estate investors don’t know where to turn.

No Relief in Sight

According to the experts, the Covid-19 pandemic isn’t going away anytime soon. The International Monetary Fund expects a global downturn of approximately 4.9% in 2020*. Studies show that foreclosure rates may double next year**. Through all of this, mortgage forbearance is merely a short-term band aid. It certainly doesn’t make up for months of lost rent and uncertainty.

An Exit Strategy for Underperforming Assets

Despite the current environment, residential property values are still at historic highs. We’ve just experienced the longest bull market in US history. Nationally, residential property values have increased almost 50% since the market bottomed out in Q2 of 2012***. In certain local markets, the appreciation has been even more drastic. In the SFH markets (Single Family Home), low supply means listed properties are flying off the shelves or see bidding wars. The best investors know how to adapt and react in choppy seas, and now may be the time to act.

For landlords and real estate investors tired of their underperforming investments, freeloading tenants, property management, or just looking to capitalize on property value appreciation, the DST (Delaware Statutory Trust) might be the answer. By pairing the DST with the 1031 exchange, accredited real estate investors are able to sell their current properties, defer the ensuing capital gains taxes, and purchase fractional ownership of passive, institutional quality commercial real estate assets. These DST replacement properties provide investors the potential for cash flow and appreciation while allowing diversification nationally and by real estate sector.

If a tax-deferred exit strategy or passive real estate investment appeals to you, give the Fortitude team a call or check out our website - 1031DST.com!

1. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
2. https://www.attomdata.com/news/market-trends/figuresfriday/residential-foreclosure-activity-in-u-s-could-easily-double-over-coming-year/
3. U.S. Federal Housing Finance Agency, All-Transactions House Price Index for the United States [USSTHPI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USSTHPI, August 29, 2020.

This is for informational purposes only and is not an offer to buy/sell an investment. Because investors' situations and objectives vary this information is not intended to indicate suitability for any particular investor. Fortitude Investment Group does not offer tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.