Should I Invest in Rental Properties Post-Pandemic?
Turmoil creates opportunities. And the coronavirus pandemic brings a new global perspective to the word “turmoil.”
In the US, widespread unemployment – unofficially as high as 20-25% according to MarketWatch – took hold quickly but won’t release its grip nearly as fast. While foreclosure suspensions may have delayed the gathering wave, many analysts worry it will still crash.
Even among those not behind on their mortgage, many find themselves with an urgent need to sell. All of which spells opportunity for real estate investors.
Meanwhile, some investors see inflation on the horizon, with the Federal Reserve projected to create $3.5 trillion in new dollars from scratch this year, invented out of ones and zeroes to digitally buy government bonds. To protect against that inflation, investors turn to “real” assets with inherent value: commodities, precious metals, and of course real estate.
It’s one of the undervalued benefits of investing in long-term rentals: rents and property values rise to keep pace with or even exceed inflation.
But as pandemic fears gradually ease and investors mull how to navigate the coronavirus-induced recession, keep the following risks, challenges, and mitigation strategies in mind.
Challenge 1: High Unemployment & Risk of Rent Defaults
With a quarter of the workforce either unemployed or underemployed, many tenants face serious financial trouble. Stimulus and unemployment checks have prevented mass rent defaults so far, but the longer the recession lasts, and the slower the recovery, the greater the risk of rent defaults.
At best, that means evictions. Which are expensive and time-consuming even in normal times.
These aren’t normal times. With evictions suspended in much of the country, many landlords must simply pay for their tenants to live for free while they wait for moratoriums to lift.
And when that happens, landlords should expect a backlog of evictions and a much longer timeline.
Mitigating the Risk of Rent Defaults
As crucial as tenant screening is normally, it’s more important than ever right now.
Don’t just look at applicants’ income. Look at their likelihood of continued employment, their job stability, the stability of their industry. Talk to their supervisor about what kind of worker they are, how conscientious. Talk to their current and former landlords about how they treated their homes, whether they make every single rent payment on time.
And, of course, run tenant screening reports. Beyond credit reports and full criminal background checks, run nationwide eviction history reports.
Don’t stop at tenant screening though. Buy rent default insurance – at least, once insurers start issuing it again. The insurers we work with on it have all suspended new policies until evictions resume.
Finally, keep an eye on local unemployment rates. Not all areas are getting hit evenly by unemployment: take a look firsthand at this county-by-county interactive map of the US:
Challenge 2: The Inability to Evict
As mentioned above, many landlords can’t enforce their lease agreements right now. The two-way legal contract is only one-way enforceable.
These eviction suspensions come in several varieties. In some cases, they involve rules issued on the state or county levels, banning evictions for a certain time period.
Other jurisdictions haven’t explicitly banned them, but civil courts remain closed. The eviction process requires a rent court hearing, and without it, landlords can’t complete the process and remove defaulting tenants from their properties.
Then there’s the CARES Act, which suspended evictions until July 24, 2020 for the following types of properties:
- Properties secured with Fannie Mae, Freddie Mac, FHA, VA, or USDA mortgages
- Properties where the landlord takes the Low Income Housing Tac Credit (LIHTC)
- Properties with Section 8 tenants and public housing projects.
It’s hard to get excited about signing lease contracts you can’t enforce.
Mitigating the Risk of Banned Evictions
First, don’t buy properties in any state or city with an active ban on evictions. All too often, landlords ignore the role that regulation plays in their returns, but in my experience, landlords earn higher returns in jurisdictions with landlord-friendly regulations.
Second, don’t use conventional government-backed mortgage loans to fund your rental property purchases right now.
Third, serve eviction notices immediately once allowed, and be the first person to file in your local court on the day they allow eviction filings again. Expect long eviction backlogs, so make sure your property is first in line.
And, once again, aggressively screen tenants for all vacant units before signing new lease agreements.
Challenge 3: Financing
It’s a lot harder to get a mortgage right now than usual. And that goes doubly for real estate investors.
Every single portfolio lender we know who specializes in working with landlords suspended new loans during the pandemic. And why should they keep issuing rental property mortgages, when landlords can’t enforce their leases? With high rent default rates come high landlord loan default rates, although some lenders have started issuing rental property mortgages again, albeit with tighter lending terms.
Conventional mortgage lenders are still issuing loans, but landlords who take them can’t evict. Besides, most allow only four mortgages maximum on borrowers’ credit reports, and since they themselves report, investors quickly bump up against their limit.
Make no mistake: there’s a credit crunch right now, and no one’s having a hard time getting loans than landlords.
How to Finance Rental Deals Anyway
Landlords may need to get creative to line up rental property mortgages right now.
One option involves tapping the equity in existing properties, through either a home equity loan or home equity line of credit (HELOC). “Many landlords are surprised to learn they can take out HELOCs against their rental properties, not just their primary residence,” explains Darren Robertson of Northern Virginia Home Pro. Of course, you have to actually have equity to tap into, which many landlords don’t.
Alternatively, real estate investors can negotiate seller financing. With so many distressed, urgent sellers in the market, some will inevitably keep an open mind to financing your purchase.
Finally, consider opening unsecured business lines of credit and cards. Real estate investors qualify as business owners, and services like Fund & Grow can help real estate investors open business credit lines and cards totalling $150,000-$250,000 in available credit.
There will be plenty of opportunities for real estate investors in the months to come. But with those greater opportunities come greater risks and challenges.
Keep one eye out for deals, the other on managing risks, and ensure that you come out the other side of this recession wealthier rather than poorer.