Times of turmoil offer the greatest opportunities for investors. Several centuries ago, Baron Rothschild famously asserted, “The time to buy is when there’s blood in the streets.”
It was true then, and it remains true today.
What that pithy quote doesn’t mention is the greater risk that investors also face during these periods of upheaval and economic contraction. As a real estate investor, how do you navigate those greater risks and greater opportunities during the COVID-19 pandemic?
You understand them clearly, and invest through calculated risk.
Heightened Challenges & Risk Factors
Before you can mitigate any risk or surmount any challenge, you first need to comprehend it. Keep these risk factors and unique coronavirus pandemic challenges in mind before investing a cent in today’s volatile environment.
Real estate investors should have multiple contingency plans for exit strategies, so they never find themselves stuck holding a property that costs rather than earns them money.
But it’s not exactly an ideal time to sell properties. To begin with, far fewer would-be buyers are in a position to buy—at the time of this writing, over 30.3 million Americans have filed for unemployment. Economists pegged the unemployment rate as high as 20% currently, and it’s poised to rise even higher in the coming weeks. For context, the peak of unemployment during the Great Depression was 25%.
Even those still working are having a harder time getting a mortgage today than two months ago. More on that shortly.
Early data from the NAR show pending home sales down 20.8%. Even worse for sellers, an NAR study found 90% of Realtors reported homebuyers pulling back from the market.
That makes flipping houses hard right now, and leaves fewer options for investors across the board.
Nearly Nonexistent Vacation Rental Demand
Another option off the table for investors? Short-term leasing properties as vacation rentals.
With tourism all but evaporating globally during the pandemic, Airbnb landlords have had to find other uses for their properties. Many have converted them to long-term rentals, flooding the market with vacant units at a time when fewer renters actually want to move. Others have tried to convert them to mid-term corporate rentals—again, at a time when fewer people are employed or traveling for work.
It takes yet another revenue strategy off the table for investors.
Higher Risk of Rent Defaults
Traditional long-term landlords face another risk: defaulting tenants.
With unemployment surging, many tenants cannot afford to pay their rent. And rising anti-landlord and anti-capitalist sentiment among left-wing activists fueled the largest rent strike in decades even among tenants who can afford to pay.
And they can get away with not paying rents, because most U.S. landlords can’t legally enforce their lease contracts right now. Between the CARES Act suspension of evictions at properties secured by federally-backed mortgages and Section 8 properties, state and local moratoriums, and civil courts being closed in much of the U.S., landlords have no legal recourse if tenants violate their leases.
While the CARES Act expires on July 24, it could well be extended—which says nothing of the other restrictive forces such as civil court closures.
It’s awfully hard to get excited about buying a rental property when only the landlord’s obligations are enforced. Today’s environment leaves tenant rights in place while stripping landlord rights.
Rental investors need deep pockets right now, because they may not collect a cent in revenue until the crisis stabilizes. And because they may not find any financing, either.
Every portfolio lender that I work with has suspended new rental property loans. When our students ask me where to go for funding right now, I’ve been pushing them toward rotating credit lines, because I don’t where else to send them.
It makes sense, too. If landlords can’t enforce their leases, many will default without incoming rents from tenants. So why would lenders extend them loans?
I certainly haven’t issued any private notes to landlords since the crisis, even though I know and trust them. It doesn’t matter how trustworthy they are if they can’t collect rents.
Conventional lenders have tightened up, as well. Many analysts predict mass mortgage defaults, which seems almost inevitable with unemployment surging in the tens of millions.
All of which makes it hard to leverage other people’s money to invest in real estate right now.
Opportunities for Real Estate Investors
We’ve seen a spike in troll attacks in our blog comments at SparkRental, and in our landlord and real estate investor Facebook groups, from anti-landlord activists. They sling words like “vulture capitalist” around, and in some cases even publicized landlords’ and investors’ personal information, such as their home addresses and phone numbers, with instructions to “attack them.”
Which makes me wonder: why is it less ethical to buy real estate assets during a down market than it is to buy stocks or bonds or commodities? And if no one invests in rental properties, who will provide housing for the nation’s 43 million renters? I don’t think anti-capitalist activists bother thinking that far ahead though.
The COVID-19 pandemic has changed my real estate investing plans, but I still intend to buy. There will be plenty of opportunities to find deals for savvy investors with the resources to buy.
Lower Market Pricing
We’re already seeing home prices dip. Early data from Redfin showed new listing prices dropping by $21,000. In recent weeks, prices stabilized, but Redfin noted that homebuying demand is down 19% year over year.
While I don’t expect home prices to dip much as a nationwide average, at least not immediately, some markets will fall much harder than others. See this article I published with an interactive map of the highest-risk housing markets in the U.S. based on a study by ATTOM Data Solutions.
Markets heavily dependent on tourism, leisure, and hospitality will get hit particularly hard, as well. Investors may find willing sellers in these markets (although not necessarily willing and able renters).
All real estate is local—there’s no such thing as a “nationwide real estate market.”
In the industry, we refer to the “three Ds” of distressed sales: defaults, divorces, and deaths. None of those are slowing down in the midst of the COVID-19 pandemic. Quite the opposite, in fact.
Many sellers have pulled out of the market, preferring to wait out the crisis. But many others have left their listings in place, some with an urgent need to sell. Their reasons vary, but a certain percentage of these urgent sellers would rather accept a fast, sure settlement than a high sales price. (Read: opportunity for deals.)
It helps if you can make a cash offer, given the tight credit environment right now. Just as important as having a plan to fund your deals, make sure you have an exit or revenue strategy in place, ideally with contingencies. You don’t want to find yourself another crunched landlord with defaulting tenants and no option to replace them with paying renters.
Crunched, Tired Landlords
One of the best sources of off-market deals is a “tired landlord”—thsoe who just can’t field another 3 a.m. phone call about a burnt-out lightbulb, another excuse about non-payment, or another drug-dealing freeloader boyfriend who moved in with your sweet, naïve tenant.
All those anti-capitalist activists who rant and scream and hate landlords so much? It turns out they suffer under the same delusion as newbie landlords: Most people have no idea what kind of expenses landlords face.
Experienced landlords refer to the “50% Rule.” That is, you can expect to lose around 50% of the rent to non-mortgage expenses. It’s why we drill into our students over and over again how to forecast rental cash flow because most new landlords get it so wrong.
Many landlords with non-paying tenants right now can’t afford to keep their properties. Consider them another type of distressed sale: property owners who would rather take a quick settlement than a high price.
Inflation & the Potential Price Spike
With trillions of new dollars being injected into the economy by both the Federal Reserve and Congress, many analysts—myself included—expect inflation to hit hard once the economic recovery takes off.
Granted, that may not happen for a while. But sooner or later, it will happen.
And real estate makes the perfect hedge against inflation.
Inflation aside, housing markets tend to weather recessions quite well—far better than stocks do, based on historical data.
In fact, the real estate industry historically helps pull the economy out of recessions. People still need a place to live, and the housing industry drives many millions of jobs, both directly and indirectly.
And if none of that convinces you, consider that the U.S. entered the pandemic with a housing shortage, particularly among starter homes and rental properties. That’s getting worse, not better: housing starts posted a 22.3% drop in March, the worst drop in 36 years. A supply reckoning will come, as construction falters due to the coronavirus pandemic.
Should you invest in real estate right now?
Maybe. It depends on your risk tolerance, on your cash cushion, on your market.
I still plan to invest, although with far more caution. I don’t plan to buy anything until evictions become possible again. If you can’t enforce a legal contract, you shouldn’t enter one, and if you shouldn’t sign a lease, you shouldn’t buy a rental property.
Do you plan to buy real estate during the COVID-19 pandemic? Why or why not, and under what circumstances?
Written by: Tony Paulino, Associate Broker at Realty Partners