Preface: This article has been edited daily since starting it. The facts may change from one day to the next but this is my opinion as of this moment – for whatever they are worth to you.
A good friend asked me to write about my take on the Coronavirus and real estate. Before I get into that, let me first say that this virus is a real thing and people have died from it. I’m not, in any way, making light of it here. My prayers are for those affected by it. I personally believe that we are over-reacting necessarily. We have to overreact to get ahead of the virus. I work with firefighters who are on the front lines of this. They face a more invisible foe than fire and one that likely won’t kill them but could kill someone in their family that did not swear to serve their neighbor at their own personal risk. I am grateful for the precautions you take to follow the CDC guidelines and thus protect all of us in America and beyond.
For those of us lucky enough to not be suffering from it, we need to consider what the effects may be on our lives – financially and otherwise. I believe prognosticators are about as accurate as dart-throwing monkeys so I cannot say what the effect of this event will be but I hope that this will give you some food for thought. I’m not an economist and I’ve never seen a reaction to a virus like this so all of these are simply ideas I am ruminating on.
At the Best Ever Conference that we attended in Keystone Colorado a couple of months ago we heard some great debates on where the economy was and where it was headed. One of the most compelling was lecture from a real estate economics professor from Colorado University. His outlook was still positive barring a “black swan” event. What is a black swan? “A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight” according to Investopedia. I would say that this pandemic meets all of those except that it was obvious in hindsight. While Bill Gates and others have seen this as a great vulnerability of our society, most of us surely didn’t see this coming. Perhaps in years to come it will seem like it should have been obvious but at a few weeks into it, it surely doesn’t seem like it was.
As rental real estate entrepreneurs we must decide how to react. I believe that first we have to acknowledge that we cannot go backwards and make different decisions so we should get a bearing on where we are and what we are going to do moving forward. As for our business, we are holding steady. We’re playing defense and tightening our belts financially but we believe that C+ and B class rentals are about as safe as we can get and still attract the tenants we want. We are in this for the long haul. People still need a place to live. We will still provide that.
We recently had a drought of deals that met our criteria. We were feeling frustrated and were making offers but we didn’t sway from our criteria. We are glad that we didn’t change our criteria as we are now in a difficult place where thin margins could have become negative cash flow situations. We wanted to keep our private lenders’ money working for them but we first had an obligation to make sound investments with their money. So the difficulty finding deals, we knew, might force our lenders to put their money elsewhere and make it unavailable to us when we did find a deal. We communicated with our lenders to let them know we were actively looking but were protecting their money and ours by being selective. I am grateful we didn’t let desperation for a deal sway us from our criteria. I feel we are in a more solid situation because we are not mid-project on a marginal deal. This may be a lesson for others and it has nothing to do with seeing this coming because we certainly did not. We just determined what our criteria would be and we stuck to it with only minor tweaks over the years as we learned more.
On a negative note, we had a plan in place to reposition some equity in our portfolio through a process of a 1031 exchange and some refinances beginning in June. This plan may be delayed or unattainable now. QM lenders (that are government backed) are still lending but the non QM private money lending institutions that were lending three weeks ago are largely pulling back and either not lending or adjusting their criteria by quite a bit. This means we need to pivot and adjust from where we currently are. I wish we had more liquid capital but I also am glad for our conservatism in deal underwriting.
Perhaps you’ve been sitting on the sidelines. Now may be your chance to get in the game. Financial instability creates opportunities and we have to be looking for them. One thing I have noticed about real estate investing since first considering getting involved is that there is never a perfect time to get in. Some people think that they missed their chance in the years right after 2008 when houses were on sale. What they sometimes miss is that banks were not lending. It might have been like seeing a two-for-one sale and having no money to buy with. So what is the opportunity now? Perhaps some of the riskier buyers who have been overpaying for wholesale deals or off market deals will back off out of fear. Maybe prices in the greater real estate market cool. This could begin to tip things back toward a buyer’s market. And money is on sale right now – rates are extremely low. This could set up a real buying opportunity for those willing to jump in when people become fearful. This is easier said than done but it is in keeping with the great contrarian investors – “buy when others are selling”.
I believe that there will be a lot of opportunity in our not-so-distant future. I also believe there will be people who take advantage of the misfortune of others. My advice is to try to solve problems for people. Help find win/win solutions. Do business that you can be proud of and hold your head high. Greed will take over for many and they will exploit the hardships of others. You have to dial in your own moral compass and keep an eye on it when negotiating the coming opportunities.
Don’t tell anyone but I still have some money in the stock market. I seriously discussed with my better half the idea of moving it to safer alternatives the other day but ultimately followed conventional wisdom to not try to time the market. Well today I’m not looking at my balances. I just don’t want to see the carnage. If I had done what I considered, I’d probably put half back in and buy at a discount now then wait to see if it goes lower to buy back in with the rest. But I didn’t and I’m not going to lament that.
There is risk in real estate too. Make no mistake about it. I have friends who are hemorrhaging because bookings are down on their Air BnB short-term rentals. This virus may pass and get everyone back to traveling soon so hopefully they can hold out until then. If not, hopefully they can cover expenses with long-term renters and selling their furnishings. Ultimately we are all starting today from right here where we are and none of us could have seen this virus coming.
As far as this monkey throwing darts (me), my best guess is a little more pessimistic than my friend who prompted this article. I think that markets are emotionally driven. I feel like we’ve all felt a correction was overdue and that the Corona virus, on top of the situation with oil prices, has tipped the scaled into a full-on recession although it won’t be technically labeled as such until we have two quarters of economic decline or contraction of GDP. Since writing the draft of this piece, the Fed has dropped interest rates yet again – this indicates their level of concern. The Fed is pulling out all the stops with a buyback program and other post-’08-esque maneuvers that likely won’t have the desired effect. My friend thinks this is more likely just a blip and we have strong fundamentals for a fast recovery. And that monkey (no offense) may be more accurate than me.
While my market outlook is just a bunch of my best guesses strung together, I believe that regrets are useless. The best thing we can do is find our footing and plot our course out of this. We have the genes passed on by amazing people such as those of the Greatest Generation that fought evil and won. They deprived themselves and pulled together for the common good. We follow people who bravely marched for civil rights at their own risk and often death. We follow parents who worked hard and envisioned better lives for us than they themselves had. We are being asked to deprive ourselves for the common good now. We have what it takes. We will overcome this challenge and the next. We are Americans!
I am hopeful that we (Home Again Properties) will make a full recovery and emerge without a credit hit, without losing a property to foreclosure, without losing any money, without having to evict any of our amazing tenants, and without missing a payment of any kind. But that may not be the case. Time will tell.
Right now I am cherishing time with my kids and my wife. We’re gardening. We’re reading books and playing music on instruments and singing. We’re eating home-cooked meals. We are focused on the gift of this forced slow-down. Today, as always, is all we are guaranteed. We are embracing it.
I know this is a serious situation but we have to keep perspective. I will offer you these thoughts to help get through this period of unknowns. Gratitude is something I try to practice daily and starting my day with listing things I am grateful for helps every day and especially now. Let me list a few things we can be thankful for in addition to those I just mentioned. Grocery stores that have plenty of food for us. It may not be exactly what we had on our list but we won’t starve – not even close. Telecommuting and other methods to make a living without being physically present. This could keep people working that would have had no option 20 years ago. The unifying of our country. All religions and political parties are, for the first time in a long time, working together toward a common goal. We have a shared enemy. We can and should use this as a starting point to look for commonalities more than differences. We can spread hope over fear. While some are posting pictures of empty shelves of toilet paper, I will continue to post pictures of full coolers of food at our local store. Life is largely what you choose to focus on. My family will focus on the positives in this situation. I hope you are able to do the same.
If you are struggling emotionally through this, reach out to me or to someone close to you who can help you find the positives in our current situation. If you have not gathered by now, money is not our “main thing”. This situation is a good time to evaluate what yours is. As the situation develops and we learn what our new reality will look like, it is more important than ever to keep the main thing the main thing!
This was written before the recent 2 Trillion dollar Bill passed for relief. Lots more to learn about before writing on the subject – it’s quite a long read!