Despite still being in the middle of the Covid-19 crisis, it is not too early for landlords and real estate investors to start thinking about what comes next. What happens in the real estate investing world when things start to return to normal? I do not have a crystal ball, but I can recall the recent crash in 2008 and logically think about what may be in store over the next few years. Yes, I said years. The fallout from this virus and the unprecedented response to it will, I believe, last for years.
I think that we can all agree that things are not going back to the status quo. The future world of landlording and real estate investing will not be the same as it was in March 2020. Perhaps things were about to change anyway as many thought our economy was overheated and about to pop. No matter what made it pop, pop it has and the effects will likely be many.
First, the money has stopped flowing. The economy has basically been shuttered and much of the county’s business operations have ceased or slowed significantly. This shuttering has resulted not only in a loss of jobs, but a slowdown in spending. Are you buying gas, clothes, going to the gym or planning your next vacation? I’m not and neither are many others. The lack of spending means no income for many businesses and a ripple effect for many more.
While the economy will shift to meet new demands created by the shuttering of the economy (delivery services, warehousing, etc), it will take time. Meanwhile people have been laid off. Others have had their hours or salaries drastically reduced. Businesses have closed and may never reopen. Entrepreneurs have canceled plans to open new businesses and government is becoming more and more interventionist in the economy.
We landlords will feel these effects through our tenants. Some tenants have lost all or most of their income and can now not pay their bills. These folks will be forced to make some tough financial decisions in the next few months. Will they be able to remain on their own or will they need to move back in with mom and dad? Perhaps they will decide to reduce costs by moving in with roommates or seek cheaper rental options. Many tenants may be able to make it through this month, but what about the next or the one after that? Thus, not only will we landlords experience unpaid rents, I think our vacancy rates will increase as well.
Those increased vacancy rates will lead to further issues. Increased vacancy means softening demand. Softening demand means reductions in prices or rents as landlords try to reduce vacancies (Los Angeles has already witnessed it’s first rent decrease in over a decade). Vacancies will not only mean less income, they will also mean more expenses. As tenants move, they create turnover costs and as I have written before, tenant turnover is a cashflow killer. Expect this cashflow killer to rear its head in the next few months as the fallout from this crisis continues.
Secondly, some landlords will not survive. Those that are highly leveraged with minimal positive cashflow or have no reserves will not be able to weather this storm. As their tenants fall behind on their rent or move, their limited reserves will be used up paying PITI and trying to get their units rent ready again. Properties will begin to fall into the no income death spiral and some will be forced into foreclosure.
Foreclosure is a long and debilitating process. Banks do not really want to hold real estate and may be overwhelmed as well. Banks will perform only minimum maintenance and will shut the properties down by evicting tenants and turning off utilities. After a year or two, after much neglect, these properties will be listed for sale, probably at a steep discount. But not before displacing and disrupting many investors, tenants and perhaps even entire neighborhoods.
In sum, over the next several months things could be rough for all of us. Both tenants and landlords are going to face challenges. The rainy day is here and it is why I have written about the need to budget for reserves. If however you can hold on and ride this crisis out, there may well be a few real estate deals available for those of us still standing at the end of this thing.
In the meantime, keep those lines of communication with your tenants open. Try to face the problems that arise head on before the become too big. Remember too that we smaller landlords have an advantage. We are more nimble and have the relationships to get us through this thing.
How is your landlording business faring during this crisis? Please share with a comment.
Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors. Subscribe to Smarterlandlording here. Contact Kevin here.
