Times of turmoil make the best investing opportunities. For those who have both the money and the stomach to invest, that is.
As a real estate investor, you remember how far both stocks and property prices fell during the Great Recession. And how far they climbed later.
But times of turmoil also come with increased investing risks and challenges. You need to navigate both the heightened risks and the heightened opportunities to come out richer rather than poorer from a recession cycle.
Greater Real Estate Challenges & Risks
The COVID-19 pandemic does not represent business as usual for real estate investors. We face far higher risks than usual, both as existing owners (landlords) and as investors looking to buy new properties.
Before investing a cent, make sure you understand the following risks and challenges during the Coronavirus pandemic.
Collapsed Vacation Rental Demand
It’s no secret that Airbnb landlords are suffering right now. The tourism and hospitality industries have all but collapsed, leaving many Airbnb landlords with 0% occupancy and $0 in revenue.
During normal times, real estate investors have multiple revenue strategies at their disposal. They can compare returns from using a property as either a long-term rental or short-term Airbnb rental. But with tourism halted in its tracks in most parts of the US, that option is off the table.
Some properties only see cash flow when used as a short-term rental, and cost money rather than earn it as a long-term rental. And let’s be honest, not everyone wants to be a long-term landlord, chasing down nonpaying tenants and filing for eviction hearings.
Unemployment & Greater Rent Default Rates
With unemployment rates soaring over 15%, fewer tenants can afford to pay their rent. Some counties face unemployment rates over 25% — see this interactive map of unemployment rates by county.
All of which spells trouble for landlords.
Few landlords can carry their mortgage payment for long without receiving rents. Making matters worse for landlords, many can’t even replace nonpaying tenants with paying ones right now. The CARES Act suspended evictions for 120 days on all properties secured with a government-backed mortgage (Fannie Mae, Freddie Mac, FHA), all Section 8 properties, and all properties where landlords take the Low Income Housing Tax Credit (LIHTC).
Many states and cities have declared blanket eviction moratoriums in their jurisdictions, and still others have closed their civil courts, making it impossible for landlords to schedule an eviction hearing.
In other words, many landlords have no way to enforce their lease agreements.
Rental property owners have fewer exit strategies across the board right now. Thousands of prospective buyers have pulled out of the market, and among those remaining, many are bargain hunting.
According to the most recent data from the National Association of Realtors, pending home sales have plummeted 20.8%. Similar data from the NAR found that 90% of real estate agents have reported buyers putting their house hunt on hold.
None of which bodes well for property sellers.
Investor Financing Challenges
Even among those buyers remaining in the market, many are finding it difficult to get a loan.
That goes doubly for real estate investors. Of the portfolio lenders I work with, every single one has suspended new landlord mortgages. Some still offer short-term purchase-rehab loans, but if the real estate investor wants to refinance the property as a long-term rental after renovating it — the BRRRR method — they can expect a serious challenge in finding long-term financing.
Word to the wise: create several financing contingency plans before making any offers right now.
Opportunities for Real Estate Investors During the Pandemic
The news isn’t all bad for rental property investors. Despite the added risks and challenges, investors can also take advantage of greater opportunities right now.
More Distressed Sales
Sure, there are plenty of mortgage assistance programs in place during the pandemic. But that doesn’t mean no owners find themselves with an urgent need to sell.
Investors refer to the “three D’s” of distressed sales: defaults, divorces, and deaths. And you better believe none of them have slowed down during COVID-19. On the contrary.
Keep an eye out for distressed sales. Use platforms like the Mashvisor Marketplace to look for off-market deals. Among on-market MLS listings, don’t be afraid to make lowball offers. Some property sellers can weather this storm and hold out for higher prices, but urgent sellers will accept a lower price in exchange for a quick settlement.
Reach Out to Pinched Landlords
Among those distressed sales you’ll find plenty of pinched landlords, caught between nonpaying tenants and the inability to evict and replace them with paying renters.
Even as landlords struggle to maintain their cash flow during the pandemic, many face their own job losses. They can’t afford to carry mortgages on their properties without rents coming in. And their mortgages usually aren’t protected by the CARES Act either, which focuses on homeowner-oriented loans (Fannie Mae, Freddie Mac, FHA, and so forth).
Bear in mind that even as landlords face a cash flow crunch in the short term, many analysts foresee reliance and strong performance among residential rental properties in the aftermath of the pandemic. Historically, the real estate sector of the economy has actually helped pull the country out of recessions.
And in the wake of unprecedented government stimulus, many expect a wave of inflation to follow. Which makes a great reason to invest in real estate.
Real Estate as a Hedge Against Inflation
When inflation hits, few assets perform as well as real estate.
Why? Because it carries inherent value, independent of the currency used to buy it. Like food and other necessities, people pay the going rate for housing — if the dollar loses value, people just pay more for the things they absolutely need. Like commodities, real estate makes an excellent hedge against inflation.
And despite the temporary deflationary pressure of lockdowns, social distancing, and the ensuing recession, make no mistake: printing trillions of new dollars will devalue the currency, once the economy staggers to its feet and people start spending again. It won’t happen tomorrow, but it will happen over the next few years.
When prices and rents start lurching upward from inflation, today’s home prices will look awfully attractive in hindsight.
Yes, with caveats.
Real estate investors face greater risk than usual right now, but they can also benefit from the greater opportunities in the trembling market. Some sellers feel an urgent need to sell at the moment, so they will accept lower offers. Some markets, such as those heavily dependent on tourism, are seeing a sudden drop in demand for housing. Many landlords are feeling the pinch of unpaid rents combined with mortgage payments due.
All of which means savvy investors can score great deals right now. Just be careful to protect yourself with a thicker cash cushion than usual, and extremely conservative cash flow estimates based on higher-than-usual vacancy rates and defaults.
Are you still investing in real estate right now? Why or why not?