The COVID Pandemic, government shutdowns and media headlines all conspire to create fear in the future of real estate investments. The truth is that well managed properties in great locations with steady tenants are still a great place for financial safety while risky and speculative investments will feel lots of pain. The fundamentals of real estate investing are more important now than ever.
Distracting Headlines
We have all seen the news headlines, and they are designed to instil fear. The messages are all doom and gloom.
- Home sales are are record levels, but prices hold
- Huge Price Correction coming with high unemployment
- People cannot pay Mortgages
- Banks offering mortgage deferrals
- Tenants are refusing to pay rent
- Governments offer help to tenants
- Worst Sales in years, but prices are holding steady
- Governments printing money will create inflation
Ultimately, individual real estate investments do not read headlines, and do not care. Here are a few questions about any investment.
Investing for Appreciation or Cash Flow?
Investors who speculate in an increase in value may have to wait much longer to see a profit. This is risk, and comparable to day trading in the stock market.
Investors who bought properties that cash flow positive immediately are likely to be much safer in the short term. If rents cover all expenses and allowed extra savings for a rainy day fund, then some temporary setbacks are easily handled.
Resilient or Shaky Tenants?
There are different risk profiles in the tenants themselves. In the residential world, a government worker in an urban area like Ottawa has a much different profile than a hotel employee in a a rural area.
In Commercial real estate, restaurants that have drive throughs, liquor stores, and government tenants are wonderful anchors. Mom and pop restaurants, clothing stores, and small businesses who were scraping by represent a much higher risk.
Proper Financial Planning?
If tenants do not pay, and the lender insists on mortgage payments, then an investor might find themselves in a cash crunch. Over-leveraged investors that come to mortgage renewal may be faced with the possibility of not re-qualifying and forced to sell in a down-market.
The investors who were prudent with a 6 month vacancy plan can probably weather most storm. A proper reserve of cash or a Line of Credit provide the liquidity in these times of crisis.
Extra Info: some lenders provide mortgage deferral through government programs which can also help.
Economically Resilient Location?
An investment in a downtown market will likely at least always have low vacancy while a rural one-industry or one-employer town can be vacant for a long time.
Location. Location. Location. The mantra everyone knows, which really means that the investment was made in a high demand, economically growing, stable market.
Conclusion
In this time of COVID, there will be winners and losers, and everything in between. The safety of a real estate investment was determined years ago at the time of purchase, and solidified by proper management.
COVID is just a blip on the real estate market that will shake out the riskiest investments, leaving the strong ones standing. There will be drop in value and quick selling, which will be a loss for some and an opportunity for others.
My hope is that times like this serve to show us that real estate investing is not good or bad, but a business like any other. Focus on fundamentals, avoid unnecessary risks, and sleep well at night, waking up just a little bit wealthier than when you went to sleep.
Happy investing!
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