Evolving story, updated several times weekly as we know more.
As the coronavirus continues rattling investors and shuttering businesses around the world, people keep asking me the same question over and over: What will the impact on real estate be?
Because no one knows how long the global pandemic will last, no one can know how long businesses like hotels and airlines and restaurants will suffer. Or, therefore, how long any recession or downturn will last.
Even so, real estate is inherently far more stable than stocks. Because it’s much less liquid – it takes months to sell a property, not fractions of a second – it can’t gyrate wildly in value like stocks.
And even more relevantly to real estate investors, people still need housing even in a recession. They don’t need to hold onto their stocks.
As you mull over your next financial move in this moment of fear, keep two truths in mind. First, real estate is a long-term investment. Second, as Warren Buffett so frequently reminds us, “Be fearful when others are greedy and greedy when others are fearful.”
The last time people were this financially fearful was the Great Recession. Which created the greatest buying opportunity in the modern era, for both stocks and real estate.
The Risk of Recession
Before diving into some of the economic forces impacting real estate investors during the coronavirus pandemic, the elephant (or bear) in the room is the risk of global recession.
Economists surveyed by The Wall Street Journal lowered their economic forecasts for 2020. Most foresee at least one quarter of contraction, and many see two quarters, which would meet the definition of a recession.
We’re already seeing the impact. The travel industry has been slammed, with airlines cutting route coverage, hotels cutting employee hours, and many hourly employees being let go. The hospitality and entertainment sectors have seen similar pain, with theaters closing, concerts canceling, and restaurants and bars either closing or limping along with minimal business. Even many gyms have shuttered.
Business owners will struggle to make their rent payments, as will cut or reduced employees. Which means their landlords will struggle to make their mortgage payments.
But this isn’t 2008. The underlying fundamentals of the economy were strong leading up to the pandemic, with unemployment nearing record lows and corporate profits pushing record highs. Banks have more liquidity than they did in 2008. Americans hold less relative household debt: 96% of gross domestic product, compared to 134% in 2008.
Still, havoc in a few sectors of the economy inevitably spill over into others. If one group of businesses and employees suffers, they stop spending and investing in other areas too.
Ultimately the recession risk comes down to how long the pandemic wave takes to crest and crash. If it passes within a few months, the economy should bounce back quickly. It drags onward through the summer and into the fall, expect considerably more economic damage, spreading beyond the travel, hospitality, and entertainment sectors.
Actionable Advice: Tighten your personal spending to boost your savings rate. In times of economic crisis, you want more cash on hand. That cash serves two purposes: first, it pads your emergency fund to protect against shocks like job loss. Second, it positions you to buy assets at a discount, in the midst of panic selling and distressed sales.
Home Prices During the COVID-19 Outbreak
As more sellers and prospective homebuyers feel the pinch of the epidemic, savvy investors should look for opportunities to find good deals on investment properties.
In the short term, home prices will likely dip nationwide, especially if we see a full recession. Already, far more buyers have pulled out of the market than sellers, tilting the balance of supply and demand. With fewer buyers and not a few urgent sellers, expect downward pressure on prices.
Beyond the market potentially slipping as a whole, investors should see better off-market deal opportunities during the crisis. The best deals on real estate come from distressed sellers, based on the “three D’s”: defaults, divorces, and deaths. The latter two certainly won’t slow down during the pandemic. And defaults? You can expect plenty more of those.
As more people look to boost their cash holdings, more property owners will become open to selling. Use strategies like driving for dollars to find owners especially open to taking a lowball offer and just cashing out.
Expect tourist towns to take a particularly hard hit real estate-wise. Areas that rely heavily on tourism and hospitality have already been hammered, creating a huge buying opportunity. With local businesses struggling and workers seeing slashed paychecks, expect to see more defaults. Local vacation rental owners and Airbnb landlords are suffering major losses as well, making them more likely sellers. These towns may see home prices drop quickly.
Finally, note that housing starts declined in February, before COVID-19 was even a major concern in the US. Expect them to drop even further in March and April, choking supply, especially for starter homes. In the mid- and long-term, expect home values to rebound sharply after the public health crisis passes and the economy starts rebuilding. The US will miss months of new housing supply in 2020!
Actionable Advice: Identify distressed sellers who need to sell urgently. While overall home prices may or may not eventually dip, you should see more opportunities for off-market distressed sales.
Focus on the Fundamentals – In Crisis More than EverRemember, rental properties are a long-term investment. Score a good deal once, and enjoy the ongoing passive income forever. Or buy a bad deal and suffer until you eventually sell for a loss. Times of crisis make an excellent opportunity for buying long-term investments. It goes for stocks, and it goes for rental properties. First and foremost, focus on cash flow. Learn how to predict a rental property’s cash flow, and get comfortable using a rental cash flow calculator to forecast returns. If you master that skill, you’ll never buy a bad deal on a rental property. Second, think holistically about the markets where you invest. The coronavirus pandemic highlights exactly why you only want to invest in markets with diverse economies. If you invest in a steel mill town that loses its steel mill, you’re screwed. If you invest in a tourist town that relies solely on the hospitality industry, what happens when tourism dries up? Look for cities with strong job growth, population growth, and diversified economies. When we run the numbers each year on the best cities for real estate investing, we don’t just look at cap rates – we look at economic fundamentals. Actionable Advice: As you look for deals, avoid “widow-makers” – deals that could end up losing you money based on a single risk. For example, if the deal only generates positive cash flow as a vacation rental – but not as a long-term rental – then it becomes a losing deal if the local city government bans Airbnb, or the town loses its cachet as a hot destination. Or, of course, when a global pandemic halts all travel.
Mortgages, Loans, LeverageOn the one hand, the Federal Reserve has cut interest rates to basically 0%. That’s driven mortgage interest rates lower, making it cheaper to borrow an investment property loan. Cheaper, but not necessarily easier. As refinance applications soared roughly 225% over the last two weeks, mortgage lenders have tightened their criteria. They tightened loan standards because they can, in the face of all that demand, but also because investors are nervous to part with their cash in all the pandemonium and panic. Remember, most mortgage lenders don’t keep those loans on their books. They sell the loans to large, institutional investors. As you look to buy real estate over the next few months, prepare for tighter lending standards. You may need a larger down payment, higher credit scores, or better-performing rental deals to qualify for a mortgage. Actionable Advice: Set aside as much cash as you can for investing, consider alternate funding sources like unsecured business credit lines through Fund & Grow, and work on improving your credit. Be careful not to overleverage yourself, especially if you structure your deals with the BRRRR method to minimize your cash investment.
Vacation RentalsAs touched on above, it’s a terrible time to own vacation rentals. Airbnb landlords have seen mass cancellations, as the whole world suspends their travel plans. But just because they don’t have any revenue doesn’t mean they don’t have expenses. Vacation rental owners still need to pay their mortgages, to cover the costs of maintenance, repairs, property management, insurance, property taxes, and every other expense that comes with owning rental real estate. The travel and hospitality industries will rebound, of course. People will resume traveling. But not within the next few months, and even after the pandemic passes, expect tourism to recover gradually, not overnight. Which leaves vacation rental owners in a real bind. Not many can afford to keep paying their expenses for the next six months, with only minimum occupancy. So what are Airbnb landlords to do? Actionable Advice: In many markets, Airbnb landlords can simply switch their business model. They can sign traditional long-term lease agreements, potentially even leaving the units furnished. Alternatively, they can switch to a mid-term furnished corporate housing model. Believe you me, travel nurses are in higher demand than ever, and need places to live! Of course, not all vacation rental owners can switch business models so easily. In towns where tourism dominates the economy, landlords may struggle to fill vacant units with traditional tenants or corporate renters. But get creative with it, and look for alternative uses for your property. Perhaps you can temporarily convert it to affordable housing for those who lost their jobs, subsidized by the local government. Or, if you’re telecommuting at the moment, perhaps you could move into the property yourself, freeing up your home to rent out to long-term or mid-term corporate renters.
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Suspended Evictions & Foreclosures
On March 18, the Trump Administration announced it would suspend all evictions at FHA-secured properties and foreclosures of government-backed mortgages nationwide until the end of April at the earliest.
That includes FHA mortgages, and Fannie Mae and Freddie Mac loans. In other words, the overwhelming majority of conventional mortgages. The moratorium does not apply to portfolio loans however, which many landlords use to finance rental properties.
Many states and counties have also suspended evictions. That means actual put-outs; landlords can still file for eviction to start the eviction process, but not schedule a put-out date. In many states rent court sessions have also ceased, so landlords can’t schedule the court hearing either.
Thus, there is no legal recourse, no consequences that landlords can enforce when a tenant fails to pay rent. Yet there are consequences if the landlord fails to make their mortgage payment – you better believe that lender will file for foreclosure. Because sure, there are some forbearance programs becoming available for homeowners who default, but I haven’t seen any that extend to landlords.
Real Estate Investors Have Control Over Their Returns
One of the major differences in real estate versus stocks is that real estate investors keep control over their investments. When you buy a stock, you hope for the best based on historical performance. You have exactly one recourse if you don’t like the returns: sell your shares.
Real estate investors can improve the property to attract better tenants and raise rents. They can modify their tenant screening practices to place better tenants. For example, at this moment landlords could opt to rent only to those in industries largely unaffected by the coronavirus, such as healthcare, IT, and ecommerce.
Landlords can also protect against rent defaults through rent default insurance. If the tenant stops paying rent, the insurance company starts paying it, until you replace them with a rent-paying tenant.
Actionable Advice: Tighten your tenant screening standards. Look for stable applicants with jobs not likely to suffer from the outbreak. As always, choose tenants most likely to stay long-term, as turnovers are where landlords lose the most money and time.
If you learn that your contractors are out of work, consider using this opportunity to make property upgrades and repairs. Now could make the perfect time to negotiate with contractors for better rates!
Stock and real estate investors alike should buy when others panic, to move opposite the herd mentality. If you’re looking for places to invest money during the pandemic, the COVID-19 crisis offers opportunity, not just damage and risk.
It’s caused major disruptions and a stock market crash, but not based on economic fundamentals. Analysts liken it more to a natural disaster – an external event that impacts the market temporarily.
As such, many economists believe the impact will be sharp but short. With the massive economic and social initiatives being taken around the world, I remain optimistic that the pandemic will largely pass by the end of the summer. It will leave plenty of economic damage in its wake, but the world will rebuild.
In other words, it makes an excellent buying opportunity, for investors willing and able to hunt for bargain properties.
How do you see the coronavirus impacting real estate? What do you plan to do about it, if anything?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.