What % Discount Should Investors Require During Covid-19

Performance Property Real Estate Question

Q: I noticed many big institutional buyers of property are holding back now during the pandemic. How much of an equity cushion do you need when you buy investment property now? Jimmy, Franklin Lakes, NJ

A: With respect to residential property, more uncertainty requires more of an equity cushion when you buy to mitigate your risk. Take a note from the actions of hard money lenders (HMLs) recently who are lending at lower LTVs thereby requiring higher down payments from investor borrowers and are also requiring borrowers show much higher reserves from investors. The less certain you are about the true value of a property, the less you should pay for it–as a rule, investors should discount their purchase offer prices for every additional risk or uncertainty they identify in order to create a margin of safety as legendary investor, Benjamin Graham called it. Disciplined investors always get a higher value than the actual price they pay and with more than 40 million people currently unemployed amid the business disruptions caused by the covid-19 pandemic, residential property is more difficult to accurately value than it was 6 months ago. That said, residential property values don’t move that much that fast due to several factors including the illiquid nature of real estate, for example the highest annual decline in home prices in NJ in the last 20 years was in 2008 (8.5%)–Right now, given the pandemic, I think an additional 10% equity cushion or more is appropriate when you make offers to buy. Thanks for your question, Jimmy.

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