Real estate investors: How COVID-19 will change your world

For real estate investors the COVID-19 economy changes everything. It’s produced both chaos and opportunity and the big question for investors is how do you avoid one and find the other?

“Both fix-and-flip and buy-and-hold investors are looking for new opportunities,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and foreclosure data . “Right now, the market for investor properties is very competitive because prices are generally rising, inventory is tight, and distressed homes are rare.

“However, given the many job losses seen in the past few months we believe the number of distressed and foreclosed homes can more than double in the coming year or so,” said Sharga. “It’s a market that many investors will find attractive.”

The two COVID-19 economies

The COVID-19 pandemic has created two economies. There’s the economy of the employed where money flows in and debt is being reduced. There’s also the economy of the unemployed, an economy where more than 55 million people have filed for unemployment insurance since New Year’s Eve.

Earlier this year the federal government moved quickly to stave off an outright depression. There were $1,200 checks for just about everyone and an additional $600 per week for the unemployed to keep the economy going.

By August the $600 federal payments had largely vanished, the $1,200 payment was a distant memory and most federal eviction protections were gone.

If you were unemployed the government money kept food on the table and paid the rent or the mortgage. For millions of luckier households — those with jobs — Uncle Sam’s cash was a tax-free bonus used to reduce such obligations as home equity lines of credit (HELOCs) and credit card balances according to the Federal Reserve Bank of New York.

New COVID-19 rules impact real estate investors

Not only did the government dole out huge sums of money it also changed marketplace rules. It forced landlords and lenders to offer forbearance for tenants and mortgage borrowers who could not make their monthly payments. Evictions and foreclosures were largely banned.

The federal eviction and foreclosure protections applied to properties with financing that involved the FHA, VA, USDA, Freddie Mac, and Fannie Mae. Combined with state and local protections the government policies produced impressive results. ATTOM Data Solutions found that in July there were just 8,892 foreclosure filings nationwide – such actions as default notices, scheduled auctions or bank repossessions. That’s down 83 percent from a year ago. 

New opportunities – and new risks

For real estate investors there are both opportunities and dangers stemming from the COVID economy.

The real estate market has been hot. According to the National Association of Realtors (NAR), July unit sales were up 24.7% from June and 8.7% from a year earlier. The typical existing home sold for $304,100 in July, up 8.5% from the same month in 2019.

“July’s national price increase,” said NAR, “marks 101 straight months of year-over-year gains. For the first time ever, national median home prices breached the $300,000 level.”

Home prices are up in large measure because of historically low mortgage rates, tight inventories and pent-up demand.

  • Weekly mortgage rates hit 2.88% in early August according to Freddie Mac. That’s the lowest weekly rate since records were first kept in 1971.
  • NAR said home sales in July were up almost 8.7% when compared with a year earlier while inventory was down 21.1% during the same period.
  • A lot of people want real estate ownership. As Realtor.com explained in July, the “continued lack of newly listed homes on the market, coupled with pent-up buyer demand, is driving inventory to all-time lows and is also steadily pushing prices up higher.”

It’s a classic squeeze in a lot of places with little supply and lots of demand. NAR says that among 184 metro areas, 171 saw higher prices in the second quarter.

The catch is that it’s not a squeeze everywhere. In Manhattan, as one example, Douglas Elliman and Miller Samuel reported that there were more than 13,000 vacancies in July, the largest number of empty units in 14 years.

The short view – and the long

For real estate investors in many areas the short-term strategy is clear. Sell while the local market is hot and mortgage rates are low. For instance, in Toronto a “detached 1-bedroom, 2-bathroom bungalow, reminiscent of a shed more than an actual home,” was listed at $999,999 according to Toronto Storeys. After 10 days on the market the property sold for $1,800,000.

But what about long-term investors, those who want to rent property for years if not decades?

For long-term investors, the key to success in the COVID-19 economy is tenant selection. To offset risk renters must have strong credit, the largest allowable deposits, and income that’s as certain to continue as possible. With sure and steady rents investors can be in a good position to weather the current pandemic.

Like every financial option — stocks, bonds, gold, real estate or whatever – investing is never a sure thing. In the COVID-19 economy there are new opportunities and also new risks. For real estate investors  the big secret to success will be who best adapts to the new realities we all now face.

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