In the matter of 30 days the world functions as a very different place. Just over a month ago I was preparing to fly to Massachusetts to celebrate the completion of a renovation project and go out looking for the next.
Instead we are doing shelter in place with plans for the economy to reopen on a limited scale this coming week. However, many things stay in place such as the suspension of evictions and foreclosures, among other things.
With a changing world comes a changing investment perspective. I will share how it has changed mine.
Three Ways The Pandemic Shifted My Investing Plans
1.) Debt Borrowing/Access to Financing
The availability of financing has drastically changed since March. Normally we would purchase a property, renovate it, get tenants in and then pull a loan on it ASAP to get my money out. This was usually done with a long-term loan with what I like to call the secondary lenders. These are the “non-bank” companies that lend against assets.
The advantage was they did not have much of a seasoning period (the amount of time you need to own the property before getting a loan) and they lend on properties held in an LLC. Rates are a little higher, but you pay for the convenience I suppose.
Such lenders have all but fallen off the face of the earth. There are still a few out there, but with loan criteria that makes it not even worth doing. Loan to Value of 60-65%, requiring 18 months of payments in escrow, etc etc. The criteria varies from lender to lender all with the same theme – not very favorable terms.
So I find myself shifting. We finished a duplex and had it rented out April 1. My typical loan options are not what they once were and going to the local community banks is not an option because of seasoning and this particular entity only having 1 year of tax returns as this point.
New Plan, Different Money
Instead of trying to get into a long-term loan when the world is in a craze and the lenders aren’t sure how to price things I’m now going a different route that will still serve my business now and also position it better in the long-term.
The whole point of pulling financing on the duplex is to free up my capital for another project. I can still do that, but with different financing. The plan is to pull a $100K loan from a private investor with a 12 month term. This allows me to access capital to do another deal in the meantime and enough time to have the duplex fully seasoned at which point I can pull a loan from the bank at more favorable terms than with a secondary lender and then pay back the private lender. Sounds like wins all around.
Plus, do you think loan criteria and rates are going to be better or worse this time next year? I’m going to put my money (literally) on them being better. At that point lenders will know how to underwrite loans because there will be clarity on the economy. Even if the economy is down from the pandemic it is at least in a state that they can financial model it and have expected scenarios laid out.
Right now it is all a crapshoot so everyone is being overly cautious as they have no idea what lies ahead.
2.) Flipping Out to Get My Flip Out
Among the portfolio of rental properties exist the occasional flip. We have one going on right now and I’m hiring extra help and pressing to get it done and on the market. The reason is the real estate market is still strong. Yes, we have a pause at the moment with social distancing, but once that lightens up there will be a glut of both supply and demand which will be a nice bump to activity.
I expect prices for retail single family homes to actually hold up okay over the coming months, which is why I want to get this flip done and sold immediately. Real estate is a lagging market – it always has been and it always will. So when the stock market and/or the economy take a dump, real estate generally follows after the fact.
Personally, for single family and small multifamily I think the real impact is going to be seen in the second half of 2021 as foreclosures finally start to hit hard.
Right now will likely be the top dollar time for properties over the next 24 months.
3.) Hunting for Outstanding Deals
We have all heard cash is king! This is another reason I want available capital on hand – to make cash offers. Unfortunately, there are people that are gonna get jammed up or not want to deal with non-paying tenants they can’t evict. This is an opportunity to score deals at a discount.
When the eviction moratoriums get lifted there will be such a large backlog of filings that it will likely take several more months to get them processed. If you look to acquire a property in this situation after the courts kick back on by the time you take title 90% of the non-paying period has passed until the tenant is removed.
You could essentially have them out after month one. I’m happy to “inherit” someone else’s problem just before it will be solved. Solving problems is how you make money in real estate.
Plus, there will be people that just need to raise cash for one reason or another. Maybe they took a financial hit in another business or need to help family.
Continually adjust to the market and look forward in time for where the opportunity will be. In 2010 every wished they had bought more and people who paid full price in the past year may be feeling the opposite. In the end make sure the numbers work regardless of the market cycle.
Run your numbers with the property calculator and hit me up if you need any help. I love helping and mentoring new investors – especially because I had no one helping me at first so know how it feels!