5 Ways to Get Through a Pandemic as a Property Investor
- May 07, 2020
Amid the continually changing COVID-19 pandemic, there’s been a great deal of financial uncertainty. Multifamily property owners and landlords face a number of challenges as a result of the health crisis, including the ability to collect rent as tenants struggle with a loss of income.
For developers of properties, supply chains might be disrupted and stay-at-home mandates could affect labor availability and the speed of project completion.
The coronavirus has largely turned the world upside down, and there’s little wonder as to why real estate investors are anxious.
But as analysts correctly point out, there will be an end to this. No one knows when that will be, exactly, and it could be 12 to 18 months before a vaccine is available, but there will be an end. Until then, property investors must do what everyone else is trying to do: survive.
Here are five ways to get through a pandemic as a property investor.
Panic selling is almost always triggered by some event that causes massive, sudden uncertainty or fear. Investors rush to divest themselves of holdings, afraid that the value of their holdings will decline even further. Panic selling drives prices lower as droves of investors sell for whatever they can get today, simply because tomorrow could be even worse.
It’s this mindset that often costs investors considerable amounts of money. A property investor that gives in to panic and starts a fire sale is bound to wind up losing big. If there’s any lesson the Great Recession of 2008 taught various markets, it’s that some of the best times immediately follow the worst. Panicked investors who dumped holdings back then risked missing out on what became a decade-long bull run for almost the entire U.S. economy.
The statistics on rent payment and collections have been far better than the media would lead you to believe. According to the National Multifamily Housing Council, about 90 percent of apartment renters paid some or all of their rent by April 19. That’s just down from 93 percent who paid by that date the month before and for the same time period in 2019. So, while this statistic could get worse, rental income won’t likely dip enormously as people don’t want to be evicted and will find a way to pay this bill somehow.
If you’re over-leveraged however, this could lead to a negative cash flow and eventual foreclosure if investors can’t work something out with the bank—which leads to our next point.
Work with your lenders
One of the ways the federal government has attempted to stave off financial disaster is the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act. And one of its provisions is allowing for the forbearance of mortgages backed by government-sponsored entities Freddie Mac and Fannie Mae.
Forbearance occurs when a lender waives its right to foreclose while agreeing to a mortgage payment plan a borrower with a hardship can afford. Usually, this is a pause on monthly principal and interest payments, though interest still accrues for the unpaid period.
And it’s not just Freddie Mac and Fannie Mae offering forbearance—just about every bank is willing to play ball right now, whether they’re a small or large institution. They’ve all been putting programs into motion since they don’t want to foreclose on you if they don’t have to. It’s a tough time for everyone right now, and most mortgage lenders understand that.
Borrowers requesting forbearance from their lender must provide documentation of COVID-19 hardship and agree to some restrictions, such as eviction moratoriums. At the end of the forbearance period, the amount not collected must be paid back over a period of up to 12 months.
Get connected with opportunities now
As Warren Buffet advised, “Be fearful when others are greedy and greedy when others are fearful.” If there’s a time to be a contrarian investor like Buffet, it’s during a downturn caused by event-driven panic selling—like now.
Property investors will have pandemic-related opportunities. Others will be fearful, and there will be a dumping of real estate assets. Distressed properties or “busted” projects will become available at fire-sale prices. There will be investments to be had for 60 cents on the dollar, and some bargain properties will be severely undervalued.
To take advantage, though, investors should prepare ahead of time. The time to get to work with local partners and line up financing is now. Waiting for an opportunity to arise and scrambling to mobilize in four to six months will mean missing the boat.
Load up on debt
It might sound counter intuitive, but it makes financial sense to borrow money when it’s cheap to do so, when inflation lies ahead. Both of those circumstances exist now.
Borrowing at low rates to load up on assets that will appreciate in an inflationary period can be a double win. Inflation means that you’ll pay off the loan with the ever-cheaper dollars while the asset value of your property appreciates also. The debt shrinks in real dollars and the asset grows.
For example, you might acquire a $1 million building with a $750,000 loan locked in at today’s rates. That building’s value, thanks to inflation, will rise to $2 million, while the cost of each dollar you pay in interest falls over time because of inflation.
Don’t lend money
In a low-interest environment, on the other hand, it doesn’t make much sense to lend money. With inflation coming, as most economists predict, it makes less sense. Just as you pay future interest with cheaper dollars when you borrow money, you earn interest in increasingly less-valuable dollars when you lend it.
Lending money will earn little now and even less down the road, and it decreases your own buying power here and now when prices and interest rates are low. Assets like real estate allow you to keep that buying power.
COVID-19 is difficult for everyone, and the effects of the pandemic are likely to linger. The multi-housing market is not immune. But while it might seem a grim picture for real estate now, by sticking to a handful of principles, property investors can get through it and be well positioned for good opportunities as they arise.
Meg Epstein is CEO of CA South, a boutique real estate investment and development firm that focuses on niche mixed-use commercial projects in southeastern markets.