For the last three years or so, many investors have been asking the question, “When is the next recession going to happen? How can I invest soundly, not knowing if the market will tank?”
Well folks, it’s just around the corner. It seems as if something so unpredictable, a war on a virus that knows no borders, has given us the final straw that has almost completely broken the economic camels back.
While there were some other troubling aspects of the economy, such as student and consumer debt, the coronavirus is proving to be much more destructive so far. We went from an extremely low unemployment rate, under 4 percent, to a spike, and continued upward trajectory, in unemployment almost overnight.
If you are a landlord, you must be thinking of your tenants’ ability to pay rent right now. Just two weeks ago we were talking with our tenants and trying to get ahead of this thing in an attempt to ease the financial anxiety they might have had from such a shift in the economy. Many landlords are even offering incentives, credits, or even waiving rent next month. (We were fortunate enough not to require such measures)
There are a lot of other questions out there, as well. While the real estate industry hasn’t been hit hard yet, we’re starting to see deals fall out of escrow, sellers wait even longer to put properties on the market, and investors wondering if that deal they’ve got locked up would be better put on hold.nSome sellers may panic sell to liquidate assets. I’ve already seen some do so.
All this to say, these are uncertain times. So, how is a real estate investor to navigate the treacherous waters ahead? Here are several principles to help you shape your investing strategy in times of uncertainty.
Principle #1: Have Patience
Since we can’t predict the future, patience needs to be exercised. If things are worse than expected, then the market may not bottom out for some time. We’ll need to be patient as landlords, as well.
Moving forward with syndications, from an active investor’s perspective, we are waiting about a month or two to really nail down justifiable numbers for good underwriting analysis. We aren’t sure how cap rates will change based on length and severity of this pandemic. We also don’t know how collections will look. Already in the month of April we’ve seen, in a survey of 1,700 apartment operators, that collections went down almost 20%. We expect to see things get worse before they get better, and we certainly don’t want to buy a non-performing asset for our investors. That would just make it a liability.
Needles to say, patience is a virtue. Continuing to the path to financial freedom in real estate is best done with justifiable analysis.
Principle #2: Be Prepared
If you have income-producing properties, hopefully you have reserves set aside for circumstances like this. If not, then hopefully you have some equity to fall back on.
For those who wish to acquire properties, and have the means to save or raise money in the meantime, now is the time to prepare for those opportunities that will most likely be coming down the road. Of course, the optimal time to prepare is always two years ago.
I fully expect the most lucrative opportunities to arise from this pandemic, and savvy investors will be the ones to rise from the ashes.
Principle #3: Look for Opportunity
Times like these are when wealth is created. Many people wish they would have bought up properties between 2009 to 2014 (give or take). Here’s an oft-cited quote from Warren Buffett:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Current market movements imply many investors are fearful, so be on the lookout for opportunities. If Warren Buffett is investing, I want in too!
Principle #4: Continue to Learn
You should constantly be learning. But in times like these, it’s important to learn from your mistakes or assumptions you’ve made in the past.
The last few years, the overall thought was that affordable housing was bulletproof. The rationale was that even if a recession were to hit, the more affordable a place is, the more likely there is to be sufficient demand to maintain solid occupancy rates.
We’re beginning to see otherwise. Blue-collar and hourly workers are most likely to be affected by the latest circumstances, and they are the ones to most likely be renting “affordable” housing.
The average American is already in a tough spot when it comes to having an emergency fund. Those at lower income levels, even more so. I read an article just the other day that said most Americans couldn’t even come up with $400 in a crisis. If they are out of work for one, two, or more months, then the property owners who offer affordable housing may have a predicament on their hands.
Further, with schools now closed and children at home, the burden is on parents to care for their children first. Working from home and seeking out new employment will prove difficult.
Those with white-collar jobs or the ability to work remotely uninterrupted will be far less affected—unless the ripple effect in their particular industry tampers with their ability to earn.
For continued education on what’s going on in the economy, how you, as an investor, can get involved actively or passively, what we can do to better position ourselves for continued success, and so much more. Check out our other blog posts, in addition to our podcasts, and newsletter. We are always available to chat if you have any questions!
Principle #5: Be Optimistic
It’s important during tough times to maintain a sense of optimism.
I’ll be honest. This has been hard for me. I’ve been furloughed from my W-2 job & was quickly forced to “batten down the hatches” on my finances in order to keep, not only my family a float, but my real estate business as well. Luckily, I had contingencies for a scenario such as this one, and was therefore, well capitalized, moving into the unemployment pool.
My level of reserves has been able to keep money in my pockets, as well as, my investors pockets. Keeping everyone happy in these unprecedented times!
We simply can’t dwell on the negative. This too shall pass. We’re in this together, so let’s put on a brave face, help each other out, and come out on the other side stronger, more resilient, more grateful, and wealthier than ever before!