Should You Buy Real Estate In the Wake of COVID-19?

by G. Brian Davis about a month ago in investing

Risks, Challenges, and Rewards to Buying Real Estate During the Pandemic and Subsequent Recession

Should You Buy Real Estate In the Wake of COVID-19?
Photo by Tierra Mallorca on Unsplash

As both a real estate investor and a real estate investor educator, I’ve heard the same question repeated endlessly since the coronavirus pandemic exploded: “Should I buy real estate during COVID-19?”

The answer isn’t an obvious yes or no. It depends on your risk tolerance, your investing goals, and your liquidity.

We’ve encouraged our students to think of the pandemic and the ensuing economic crisis as a period of both greater risk and greater opportunities. For investors with deep pockets and a stronger risk tolerance, it presents a once-in-a-decade chance to buy properties at a discount.

But it also comes with plenty of risks and challenges.

As you weigh your investing options, consider the following challenges and opportunities before committing your money in any one asset class.

Risks & Challenges of Buying Real Estate During COVID-19

Whether you’re a prospective homebuyer or real estate investor, the coronavirus pandemic brings plenty of challenges.

Think of the crisis in three phases: the initial public health crisis, the subsequent economic crisis, and the gradual economic recovery. Buyers face challenges in all three.

Recession Risk: Loss of Income

Most economists foresee a global recession, possibly a deep one. That means sky-high unemployment, which won’t just disappear even when businesses gradually start reopening.

Homebuyers can’t count on their job being safe in the wake of COVID-19. And real estate investors and landlords can’t count on their tenants’ jobs being safe.

For both, that means higher risk of income loss than usual. Which in turn means a higher risk of defaulting on your mortgage.

Landlords can’t necessarily just replace non-paying tenants, either.

Suspended Evictions

If your tenants don’t pay their rents, or violate their lease contract in some other way, most landlords nationwide can’t evict them right now.

The CARES Act suspended evictions in properties secured by a government-backed mortgage. Some cities nationwide have expressly suspended all evictions, and many others have informally stalled evictions with the courts being closed.

That means landlords have no way of enforcing their lease contracts. Their tenants can simply not pay the rent, and then when evictions resume, just skip the property.

Nor can most landlords default on their loans and expect clemency on their mortgage payments. Most landlords use either portfolio loans, private loans, or commercial loans – none of which fall under the CARES Act foreclosure moratorium.

All of which means far more risk than usual for landlords.

Tightened Financing

It’s hard to get a mortgage right now, particularly for real estate investors.

Analysts forecast mass loan defaults, among homeowners and landlords alike. Many of the lenders we work with who specialize in landlord loans have suspended new loans entirely. The few who are still originating landlord loans have tightened their criteria significantly.

That means higher credit score requirements, stricter debt-to-income (DTI) ratios, larger cash reserve requirements, and larger down payments required.

It’s a great time to buy in cash. Too bad most of us don’t have hundreds of thousands of dollars in cash just sitting around collecting dust!

Real Estate Opportunities in the Wake of COVID-19

For all those risks and challenges, there will also be plenty of opportunities for investors and homebuyers.

All of which starts with reduced demand, creating a buyer’s market.

Weaker Demand for Real Estate

By early April 2020, pending home contracts fell by 40%, per Corelogic. Purchase applications for mortgages also dropped, by as much as 31% in some cities (e.g. Philadelphia).

Dramatically slower demand for properties leaves the door open for buyers to make lowball offers.

Many sellers have pulled back too, of course. Those who can afford to take a wait-and-see approach are doing so. But not every seller has that luxury, with some needing to sell now, even if means accepting a lower price than they wanted.

That urgency could come from being forced to move for a job, or some similar external pressure. But now more than ever, many sellers find themselves financially distressed and needing to sell.

More Distressed Sales

Distressed sales refer to any situation where the seller is forced to sell quickly due to financial urgency. Many investors refer to the “three D’s” when they talk about distressed sales: defaults, divorces, and deaths.

None of those have slowed in the midst of the coronavirus pandemic. If anything, they’ve accelerated.

With unemployment soaring, many homeowners find themselves both unable to pay their mortgage and in need of quick cash. The CARES Act suspended foreclosures for most homeowner mortgages, but it expires on July 24 2020.

Besides, some sellers want cash right now.

That goes especially for vacant properties just sitting around and costing the landlord money. That landlord, unable to find a replacement tenant at the moment, may be willing to accept a far lower offer than they’d have considered three months ago.

Real Estate Provides Inflation Protection

Between the $2 trillion CARES Act and the Federal Reserve’s $2.3 trillion bond-buying spree, the federal government has already announced $4.3 trillion in stimulus. And we all know there’s more coming.

How are they paying for it? Certainly not by cutting spending elsewhere or raising taxes. No, they’re paying for it by simply printing more money.

In the immediate term, there’s little inflation risk, as Americans have tightened spending across the board. But with all that extra money floating around, businesses and consumers will eventually use that extra money to spend more and drive up prices sharply.

When inflation hits, it will hit hard. So while cash is great right now, it will lose value when inflation hits.

Which means investors will do well to put their money in assets that protect against inflation. That includes real assets such as gold, commodities, and real estate, all of which have inherent value. It also includes many stocks, particularly sound companies who can simply adjust their pricing based on inflation.

If the government floods the economy with more dollars, each individual dollar loses value. People pay more of them for the same real goods and services. So the more real assets you own, the better protected you are against a decaying dollar.

Final Thoughts

Yes, the US and the rest of the world likely face a recession. But that doesn’t mean there aren’t opportunities to make money.

Quite the opposite, actually. Assets ranging from stocks to real estate are currently “on sale,” creating an opportunity to buy them at a discount.

Be cautious with your investments. Analyze the risks and rewards carefully. But those willing and able to invest money right now will find opportunities to position themselves well for the eventual recovery.

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G. Brian Davis
G. Brian Davis
G. Brian Davis

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