Afford Anything

  • Start Here
    • About
    • Team Afford Anything
    • Media
    • Questions?
  • Blog
    • Binge
  • Podcast
    • Binge
    • Sponsors
    • Ask a Question
    • Guest Guidelines
  • Community
  • TV
  • Explore
    • Your First Rental Property
    • Travel
    • Start a Blog
    • Earn Extra Income

May 21, 2020Written By Paula Pant

“Invest in real estate during a pandemic? Are you crazy?”

How to take a good rental property listing photo

“Invest during a pandemic? Are you crazy?”

That’s a reasonable question. Why would anyone want to invest in a volatile market and in the midst of economic uncertainty?

But recessions create opportunities. Yes, it’s terrible that millions have lost jobs and suffered huge portfolio losses, but the unfortunate reality is recessions happen. Like it or not, this is our current situation. By looking at the market and asking “what opportunities can I find?,” we contribute to the recovery.

We contribute to the recovery in all types of investments: stocks, real estate, side hustles.

When we buy stocks, we infuse capital into companies that we believe in and/or into the market as a whole.

When we buy, renovate and rent properties, we create jobs for contractors, agents and property managers and we offer our tenants a safe, comfortable and well-maintained home.

When we start a side hustle, we build products or services that thrill our clients and create jobs for our team.

When we invest, we participate in the recovery. Recessions are an unfortunate fact of life, but they carry a silver lining. And for newbie investors in particular, recessions can open the door.

Unfortunately, during times of uncertainty, many people surrender to their fear of investing. They sit in cash until it’s too late.

To be clear, I’m not talking about people who don’t have the capital to invest. If someone is financially unstable — if they lack an adequate emergency fund, for example, or if they’re buried in high-interest credit card debt — then they should be applauded for focusing on the fundamentals first. Build the foundation; everything else rests on that.

But many financially stable people will sit on excess piles of cash.

I get it. Investing is scary during a recession.

It’s normal to feel scared of buying index funds, only to watch them drop the next day. It’s natural to feel scared to start a side hustle, when you know this is a tough time for small businesses. It’s normal to feel scared about buying a rental property; what if your tenants lose their jobs?

But by sitting on too much cash, you miss the opportunity to pick up undervalued deals.

You also miss the chance to start building momentum, so that when the economy starts rebounding, you’re already established. You’ve started the side hustle. You own the rental property. You’re not scrambling to get started after the recovery is underway; your projects are in place.

You might not have enough cash to buy cheap assets at this moment. That’s okay. Focus on the fundamentals (like building an emergency fund) and don’t worry.

If you’re fortunate enough to be able to invest, though, don’t sit out this opportunity due to fear.


We discussed stocks at length in this podcast episode, and we talked broadly about how to finish 2020 financially stronger than you started in this episode.

In this article, we’ll focus on real estate.

Should you invest in rentals during a pandemic? Might we see another housing crash, 2008-style? Is this a good time to buy? To sell? Let’s explore.

“Is the real estate market going to crash again?”

Have you heard of the availability heuristic?

It’s defined as “the tendency to overestimate the likelihood of events with greater ‘availability’ in memory.”

We overvalue examples that can easily come to mind, while we undervalue examples that are harder to imagine or recall.

If something happened recently or if something is emotionally charged, then it’ll easily come to mind. And if it easily comes to mind, we overestimate the likelihood that it’ll happen again.

Prior to the pandemic, the 2008 housing crash was the most recent recession. It comes to mind quickly: it was recent and suuuuper emotionally charged.

And so it’s natural — it’s logically flawed, but natural — to assume that this current recession will resemble the last one, to overestimate the likelihood of another housing crash.

But the factors that led to the 2008 recession (subprime lending, speculative building, shady credit-default swaps) are nothing like the factors that led to the 2020 economic collapse (a deadly virus).

The Great Recession was created by weakness in the housing market. The chain of events in 2008 wasn’t: “a recession struck, therefore home prices collapsed.” It was the opposite: “home prices collapsed, therefore recession struck.”

If you started investing before the 2002 dot-com burst, or if you were already an adult during the 1987 market crash, you’ve experienced bear markets that didn’t coincide with a housing crash. But if you’re under 40, the Great Recession was the first major recession in your adult life.

If that’s your situation, then it’s especially tempting to associate recessions with real estate crashes. After all, as a millennial, 100 percent of the recessions of your adult life — 1 out of 1!! — have been tied to a massive real estate crash.

But that was a dozen years ago. The underlying economic factors are different today.

There may or may not be a temporary slight dip in housing prices. (I doubt it, but it’s possible.) If that happens, clickbait headlines will refer to this minor dip as a “crash,” because that’s eminently more clickable. Don’t be fooled by the phrasing.

Study the housing market. Read the price-per-square-foot declines. Look at the average days-on-market of homes for sale. Scan for the number of new mortgage loan originations. This data will tell you far more than any screaming headline.

“What if my tenants can’t pay rent?”

Let’s look at statistics:

In a normal market, around 20 percent of tenants are late in paying their rent, according to data from the National Multifamily Housing Council, which tracks 11.5 million apartment units nationwide.

In April 2020, that number increased from 20 percent to 31 percent. That’s not as bad as many landlords feared.

  • In normal conditions, 80 percent of tenants pay rent on time, and 20 percent are late.
  • In pandemic conditions, 69 percent of tenants pay rent on time, and 31 percent are late.

But wait! It gets better.

The NMHC surveyed apartment managers again one week later. They found a huge improvement: 84 percent of apartment households paid rent by April 12th.

Tenants might not be able to pay rent on the 1st of the month. But the overwhelming majority — 84 percent — were able to pay after a delay of less than two weeks.

As far as the data shows so far, worries that tenants won’t be able to pay rent have largely not come to pass. Most tenants are still able to pay rent; they just need extra time.

(The NMHC noted that a huge number of apartment managers volunteered to waive late fees or offer flexible payment plans.)

That said, millions of people have been helped by a combination of stimulus checks, enhanced unemployment benefits (which currently provides an extra $600 per week in addition to normal state unemployment benefits), or payroll protection if either they or their employer qualifies for Paycheck Protection Program funds. Will these programs get renewed or extended? What will happen if they don’t? There are many lingering questions, and the future remains to be seen.

The simple truth is that nobody can accurately predict the future. We can look at data about our current situation, and as of now, we know that 84 percent of tenants (out of 11.5 million household units) paid rent within two weeks of its due date. But we do not know if or how that number will change in the future. Variables that cannot be predicted — such as the speed of recovery, the level of government intervention — will play a major role in shaping these answers. We don’t know how those variables will take shape.

The greatest risk is assuming that we know the future. Beware of certainty. Those who pretend to know the future are clinging to security at the expense of honesty and accuracy. Don’t listen to any economic or market projections that are expressed with too much confidence. We don’t have a crystal ball. Nobody knows what the future holds. The wise ones recognize this and accept it.

We cannot state what will happen. We can only state what IS happening. And from that, we make preparations for what is and what might be.

“What risks should I be wary of?”

Of course, there are serious risks ahead. We do not know:

  1. … how long the pandemic and global shutdown will continue.
  2. … how long such a large portion of the population will remain unemployed.
  3. … how many employees have had their hours reduced or accepted a temporary paycut, and how this will reverberate throughout the economy.
  4. … how long the recovery will take.
  5. … whether or not there will be a tragic second wave, or third wave, which triggers an unavoidable second or third shutdown.

How can you approach smart real estate investing in this context?

Here are a few Do’s and Don’ts:

Don’t avoid investing. The people who made that mistake during the Great Recession — those who avoided making new investments from 2009-2012 — missed out on massive, opportunity-of-a-lifetime recovery gains.

Do thoroughly analyze any new rental investment that you’re eyeing. Run a variety of “what if” scenarios on a spreadsheet, crunching the numbers with different assumptions.

What if occupancy rates fell by an additional 10 percent? What if you reduced the rent by 20 percent for the next six months? How would this affect your returns?

In our course, Your First Rental Property, we provide robust, detailed spreadsheets for heavy number-crunching.

We teach our students that the cliché thrown around by other investors — who tell you to “calculate the return” — is too simplistic.

You’re not calculating “the” return; you’re calculating a range of possible returns.

You’re not stubbornly insisting that a given rental property will have an 8 percent cap rate. You’re calculating a range of cap rates in best-case, worst-case and middle-case scenarios.

Unfortunately, there are sellers who will advertise properties as having an “X” cap rate, and there are investors who take that information as a fixed number. That’s baloney.

Properties don’t have a single fixed cap rate; they have a range of cap rates, and we teach our students how to assess this range before they commit to a six-figure investment.

Don’t over-leverage. You don’t need to borrow every penny you qualify to receive.

Ignore the real estate investors who are fixated on cash-on-cash return, a popular formula that inherently rewards overleveraging.

Instead, focus on an investing strategy that prioritizes the property’s cap rate (essentially its dividend stream). This is the investment philosophy and strategy that we teach in our course.

Do maintain strong cash reserves. We teach our students to keep a minimum of three months’ gross rent, which translates to six months of operating expenses.

Don’t jump in without a specific, carefully-thought-out written plan. Before you start investing in rental properties, write your personal investor statement.

Your written investment statement should articulate how many properties you want to purchase, the speed or rate of acquisition, the type of financing you want to use, your ideal debt-to-equity ratio or leverage maximum, the type of neighborhood you want to target, the age and condition of properties you want to purchase, and more.

We provide a fill-in-the-blank template to guide you through this exercise in our course.

Do prepare a variety of ways that you can accommodate tenants who are financially struggling. Here are some examples:

Offer an incentive: 
Offer your tenants one month of free rent — which they can use immediately — if they extend their lease by an additional year.

This is a win-win scenario. You’re spared from the costs of a turnover and vacancy. You pass these savings directly to your tenant.

Waive late fees: 
If your tenant is waiting on unemployment benefits, they may not be able to pay rent on the 1st of the month. That’s fine; they’ll have the money once their benefits arrive.

Offer to waive late fees, under the condition that they stay communicative.

You want to avoid a tenant ‘ghosting’ you, screening and dodging calls from you or your property manager.

You can avert this situation by (1) letting them know you’re flexible and accommodating, and (2) telling them you’ll waive late fees as long as they send you frequent updates about their situation, like a quick text message or email, every two to three days.

Set specific and measurable communication criteria, such as: “Please text me with an update at least once every three days, even if your text is as simple as ‘hey I’m still waiting on my benefits to start’.”

Spread the payments:
Another option? If your tenant is waiting for their unemployment benefits to arrive, offer to spread next months’ payment across the rest of their lease.

Let’s say their rent is $800 per month, and they have 9 more months remaining on their lease. In this example, they would pay $0 next month, and their rent would rise by $100 per month for the remaining 8 months.


The Bottom Line: Recessions are tragic, but they also carry the hope and promise of a recovery. If you have money to invest, don’t let fear hold you back. Invest in the market, start a side hustle, or invest in rental properties. Don’t let another year or two slip by, and then scramble to get a foothold after the recovery is well underway.


Our flagship course, Your First Rental Property, opens for enrollment again on Monday, November 30th.

Learn about the course in this video below, or check out this page for FAQs, testimonials, and your chance to join our VIP waitlist. When you join, you get a free 7-day crash course on the fundamentals of residential real estate investing.

If you’re interested in investing in rental properties and want an A-to-Z guide of everything you need to know, learn all the details here.

 

 

 

Tweet
Pin3
Share37
Take Action
  • Track your net worth.
  • Earn more! Start a blog in 5 minutes.
  • Travel the world for free. See my favorite cards for free airfare.
Tweet
Pin3
Share37

Want More Helpful Stuff? Check Out My Most Popular Posts

What if We Quit Setting Goals? (Seriously?)
I Don’t Know How to Invest and I’m Afraid of Making Expensive Mistakes
The Incredible Power of 10x Thinking
I Tracked My Time in 15-Minute Increments for a Week. The Results are Embarrassing.
How Much is Enough?
Mini-Retirements, Semi-Retirement, Early Retirement — What’s the Most Awesome Lifestyle?

Posted in: Real EstateTagged in: your first rental property

14 Comments
Leave a Comment
  1. Disrupt Equity

    # May 25, 2020 at 2:18 pm

    Thanks for this Paula! I like how you pointed out not to avoid investing during uncertain times. It’s like avoiding opportunities! 🙂

    Reply ↓
  2. Lindsey

    # May 26, 2020 at 4:50 pm

    Great article! We have eaten some rent payments as a part of doing what we can to spread relief in this pandemic crisis. But fear of such rare risks isn’t worth never having owned our investment property these last 8 years! Risk yields reward, just make sure you’re financially sound to handle the ups and downs.

    Reply ↓
  3. Larry M

    # May 27, 2020 at 1:58 pm

    It’s good to read someone not screaming “OMG, we’re all gonna get killed” like some advisors are. The only thing I would go beyond this is now may be a good time to think outside the regular real estate purchase paradigm. Some people are really in a bind and many investors come along with a low ball offer to get the property at a bargain basement price. Sometimes you can benefit both yourself and the seller by giving them almost full price if they give you terms. This way you don’t tie up as much capital and they don’t get beaten up so badly with a fire sale. This doesn’t work with every deal, but something to consider when trying to solve their problem.

    Reply ↓
  4. Gevork S

    # May 31, 2020 at 4:52 pm

    Great article Paula! Peoples natural instincts during times of uncertainty is to sit on the sidelines and wait until things get better. Unfortunately, it’s during these time where the best buying opportunities exist.

    Reply ↓
  5. Dilli raj

    # June 19, 2020 at 10:11 am

    I have some little amount of money and I want to invest in something so that I will get some return to develop my business, and I am looking for options where I could invest I am searching and reading a lot of write up’s, but I am not satisfied. I was reading your article then I got a new idea to invest in real estate and analyzed about real estate is working in this pandemic time. Your article gave me a great idea for investing money for some ROI. Thank you for your valuable information and it is very helpful for business people like us. I hope to see more write-ups from you. Thank you 🙂

    Reply ↓
  6. Dane

    # July 3, 2020 at 3:30 pm

    Overall, I agree with your piece. However, your dismissal of the possibility of a drop in housing prices seems dangerous given your wide readership. It is true no one knows how things will turn out, but of course, that doesn’t mean you should be blindly optimistic. Thinking housing prices will drop now just because they did after 2008 is ignorant, but so is the overly simplistic view that they won’t drop because things are “different” this time around. In the end, every recession or downturn ends up following the path of a traditional bank run. If the pain is prolonged for too long, the damage will definitely spread to the housing market unless the government can prop up homeowners indefinitely (even then, will it be willing to prop up investors?). There will always be unknowns that will thwart any prediction of the future, but you can and should think about the likelihood of certain outcomes. Today, the average American household is stretched thin financially and overburdened with debt. Housing prices in some markets are way higher than historic norms (median income vs median home prices). Many lost jobs will not return after this virus leaves, and some parts of our culture may even change long term (such as, remote work, leisure choices, savings habits, spending choices, …). Recessions that are initially unrelated to real estate can and have effected real estate prices, and again, it depends on how long it goes on for. You cite the fact that there has been a smaller than expected increase in people not being able to make rent, but that increase isn’t small (especially given the fact that for many unemployed workers (~50%), they are making more through expanded unemployment than they made while working). Those extra benefits expire this month, and the crisis is intensifying not waning. Additionally, why speak of housing price declines broadly, when it will very much depend on your individual market. Arizona is currently being overrun by the virus, and their market was very heated prior to the downturn. It’s conceivable their market will falter more than Arkansas’s market. The same is also true within markets at different price points. Additionally, the economy didn’t slow just due to COVID 19. We actually declined before the pandemic hit, we just didn’t have the data to know it. On top of that weakness, we were hit with COVID 19. More factors than not point to a possible decline in housing prices.

    Reply ↓
  7. Allison

    # July 10, 2020 at 11:11 am

    These are strange times we are living in and being a landlord right now is trickier than before.

    I think your advice on waiving late fees and spreading payments makes perfect sense. It is in line with what Mortgage Lenders are doing for homeowners, so I think Landlords would be wise to do something similar for their tenants.

    Overall, great article.

    Reply ↓
  8. Daniel Rusteen

    # July 22, 2020 at 1:10 pm

    Tough times, tough decisions, love the article btw. I will add here the option of short-term rentals. Some, or at least for a while, are now offering their places long term, due to the travel restrictions and the uncertainty. Airbnb has moved in that direction also. Important to mind here, as always really, is the local legality; it’s pointless to consider the option that you can’t legally manage.

    Reply ↓
  9. Stacy Mizrahi

    # July 22, 2020 at 3:25 pm

    Some markets have such ridiculously low prices that I think it’s just prudent to look around. One of my business partners was selling a lot in Biloxi that was just blocks from the beach for $6k. That’s a monthly rental price in San Fran!

    Reply ↓
  10. Jay Warra

    # July 26, 2020 at 4:42 pm

    I couldn’t agree more with your post. But these times are…how shall we put it?…Strange. Real estate values haven’t tanked nearly as much as I would’ve expected them by now. Cheap financing has definitely cushioned the blow. My sense is that more patience is warranted before dipping back into real estate.

    Reply ↓
  11. Noah

    # August 29, 2020 at 8:35 pm

    I think you’re right. But the reader should know about his/her current situation a lot to invest successfully.

    Reply ↓
  12. The Millennial Money Woman

    # October 15, 2020 at 12:55 pm

    Paula –

    Another great post.
    I’ve learned that in order to be above average – sometimes you have to go against the masses. In this case, it’s investing during a pandemic (or really during any recession or depression type period).

    Thanks for sharing this article!

    Reply ↓
  13. Alexander

    # December 7, 2020 at 8:09 am

    I live in Germany and would like to invest in my first property. But we have a so called “rent brake /Mietpreisbremse” which is only available in some cities, but it reduces the yield immensely.
    This rent brake works like this: The rent must not be set too high, otherwise there are penalties. The chance that the market will regulate something has been ignored. Even with a good market situation, it is not worth investing.

    Greetings from Germany

    Reply ↓
  14. Gen

    # December 26, 2020 at 11:25 pm

    I would jump into the real estate market today if I had more of my assets liquid. Unfortunately, everything is tied up so I’m having a serious case of fomo. Regardless, mortgage rates are so low now — the lowest they’ve ever been! I’m with you… invest in the real estate market and sit on it 🙂

    Reply ↓

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

  • Binge
  • Questions?
  • Contact
Join 60,000+ subscribers who get free email updates.

© 2020 Afford Anything. Designed By Wilnau Design. Built by Zach Swinehart. Disclosure

© Copyright 2011 – 2021 Afford Anything. All Rights Reserved.

Website by Zach Swinehart.

  • Start Here
    • About
    • Team Afford Anything
    • Media
    • Questions?
  • Blog
    • Binge
  • Podcast
    • Binge
    • Sponsors
    • Ask a Question
    • Guest Guidelines
  • Community
  • TV
  • Explore
    • Your First Rental Property
    • Travel
    • Start a Blog
    • Earn Extra Income

Afford Anything

  • Start Here
    • About
    • Team Afford Anything
    • Media
    • Questions?
  • Blog
    • Binge
  • Podcast
    • Binge
    • Sponsors
    • Ask a Question
    • Guest Guidelines
  • Community
  • TV
  • Explore
    • Your First Rental Property
    • Travel
    • Start a Blog
    • Earn Extra Income