[Real Estate Investing] During COVID-19

market updates Apr 26, 2020

The time that we are in is unprecedented. With the Covid-19 shut downs and the economy taking a big hit, there is a lot of uncertainty in the air. I’ve seen several articles online written about big holding companies or REIT’s taking a hit due to tenants not paying rent. One article was titled “33% of Americans not paying rent”. What’s real? What’s a half-truth? Under what context are these statements being made? Is it safe to be a real estate investor right now? These are the questions that my friends, family and students are asking.

Here’s my take. I consider myself to be a boutique real estate investor. Meaning I’m not some big fund, real estate investment trust, or the type of person who wants to flip 100 Houses a year. At any given point of time I could have 4-5 residential fix and flips, cash flow properties, and short term rentals. I own a small business, we have employees and people who depend on us for paycheck. Right now, we are business as usual with an extra dash of urgency.

The Foundation of our real estate investing business is education. With the right education we are able to make quick decisions and stay ahead of the curve. I will go through some of the decisions my husband and I made as investors during this time. I will also cover what we are doing to be better investors and business owners.

The Deals are out there and sellers want confidence in the buyer.

In todays market sellers want to have the confidence that their buyer will be able to follow through. This is especially true for deals that may have fallen out of contract due to the buyer losing their job, loan requirements changing, or the buyer getting cold feet during their inspection period. On the acquisitions side of our business we are not afraid to let the sellers agent know that we want to be the next in line. Our offers are not dependent on being able to get a traditional loan from the bank. This gives the buyers confidence. We also have gotten away from using Hard Money Lenders. We finance our deals using private investors. As real estate investors we make our money when we buy a property at the right price. We provide solutions for sellers and help people. In the future I see the mortgage forbearance that many people had to take advantage of catching up with them. People with 2nd homes or investment properties that were financed will have to catch up and that could lead to a spike in motivated sellers. Don’t be afraid to make offers and to make those offers lower than normal. If you're not uncomfortable making your offer then your offer is too high. The sellers confidence in you being able to come through could justify a discount.

Inventory is LOW.

During the Covid-19 Crisis we listed 3 Properties for sale. Two single family houses and one double wide mobile home. All 3 went under contract for asking price and went faster than the average days on market timeline. As real estate investors this is exactly what we hope happens when we list a house for sale. Here’s a few reason why I believe this happened.

First, Inventory is low. Right now, if a seller doesn’t necessarily need to sell, they are holding out from putting their home on the market. I’ve talked to real estate agents who have sellers lined up and are just waiting for the crisis to lift. Many sellers don’t like the idea of people walking through their homes and don’t want to risk the chance of catching the virus. This brings down otherwise available inventory. There’s not a lot to choose from for todays buyer.

What’s great about our fix and flip houses is that nobody lives there. Buyers can feel safe and the home is vacant, nicely renovated and staged for them to enjoy. They can come and look at the property whenever they like. It’s easy to show and easier to sell.

People want to work.

In South Carolina, real estate is considered an essential business. We were very fortunate. It’s important to understand your states guidelines. If you are able to be out and about there may also be rules about how many people can be in one spot together and so forth that we want to be aware of. Prior to any type of stay at home order - I bought all my materials and had them delivered to the properties in case we weren’t able to do so. Acting with a sense of urgency helped get the projects moving. Our contractors understood how the situation was ever-changing. Communication was key. If you are able to work on your properties but your contractor doesn’t want to work, I promise you there are people out there who do.

Reduce your exposure.

Here are two ways I reduced my exposure to risk.

First Example: Short Term Rentals

Short term rentals had been the latest and greatest thing. I had a vacation rental that we had been renting on Air BnB. It was rented out 75% of the time and produced a fabulous monthly cash flow. It primarily rented to parents attending graduations at the University of South Carolina and Ft Jackson Basic Training. At the first moments notice of people canceling their trips we made the decision to sell the property. Looking at what was happening in Italy and realizing we could potentially be a few weeks away from a similar situation it just made sense for this property. We had owned the home for over a year. It was renovated and the neighborhood hand a little bump in appreciation. It made sense to cash out, put a large chunk of cash back into our business and free up one our private lenders for another deal.

Now this wasn’t our only Air BnB property. We had several others as well. We made the shift from vacation rental to short term rentals for Traveling Nurses. What I found was that I was able to get a similar cash flow without the high turnover. Just like Air BnB there are websites for traveling nurses and traveling professionals and it worked out really well. It’s worked out so well that as my long term tenant properties become available, we may be making the switch across the board. (On a side note, people who had been renting their houses on Air BnB could now be potentially motivated sellers).

Second Example: Fix and Flip Timeline

We have a project that we put on hold. Here is why. There’s a lot that can go wrong when flipping houses. Where I see a lot of people struggle is in their timeline to completion. When running our numbers we have to get an accurate estimate of how long it’s going to take to renovate the home and then sell the home. Investors have holding costs such as taxes, insurance, utilities etc. The biggest holding costs is the interest that an investor might be paying to their Hard Money Lender or Private Investor.

We recently purchased a property in a Historical District. In the midst of the Covid-19 situation we found it uncommonly hard to get the proper approvals, permitting, and structural engineer sign offs. We had a private investor who’s investment was funding the renovation. Due to the slow down, our timeline had shifted. Instead of telling ourselves “everything’s going to work out or be back to normal soon”, we gave back the investors funds, satisfied their mortgage, and put the project on hold. Our cost of borrowing the money could have led to thousands of dollars out of pocket and the stress of meeting an unrealistic timeline. The best part is, the lender is happy. We will use them on another project because of our credibility. To finish this house, once approvals are made, we can bring in another lender or maybe even the same one again! In the meantime we are staying away from big projects or homes located in historical areas.

Communicate with your lenders.

Let your lenders know what is going on in your real estate business and what you are doing to address the situation or opportunity. With many of our lenders the conversation was simple: Inventory is low and people are buying our houses because they are beautifully renovated and easy to show. We buy at deep discounts and if we are ever in a situation where we need to discount a property at 25-30% below retail value we can afford to do so.

Due to what’s happening in the stock market right now is when an investor should be raising capital with private money lenders. It’s sickening to think about how people’s hard earned retirement took a 20% hit from something completely out of their control. People are looking for options. As real estate investors we can pay a great rate of return and have a persons investment secured by real collateral.

Sell your property virtually.

Earlier I mentioned listing 3 of our flips during the Covid-19 crisis. All 3 of those houses are under contract at asking price. All 3 of them were under contract below the average days on market. In todays climate it’s extremely important that we make our listing as appealing as possible online.

What’s interesting is that I noticed our online “Views” and “Saves” on site such as relator.com and zillow.com were through the roof! More people than ever were sitting at home and looking at houses online. If you don’t have a good photographer or someone who can film property walk throughs then now is the time to find one. How can someone view your house with not actually having to go there? Is your online look so good that they can’t pass?

Diversify your Price Points

Prior to Covid-19 my husband and I talked about making the shift to more affordable housing. The economy was running on all cylinders and the stock market was at an all time high. But does a good thing last forever? I started investing during the mortgage crisis of the 2000’s. I don’t believe that what drove the economy back then (particularly the housing prices) was driving the economy today. However, why do we study history? Because it tends to repeat itself. There will always be good times and bad times. I could feel something coming. We had no clue that it would be this.

One of the things that makes real estate great is that people will always need a roof over their heads. There will always be a need for an affordable home. That goes for home owners and renters. I’ve started to invest more in entry level price points for home buyers in case something like this ever happened. When I say affordable housing I mean, when a couple decides to retire and is on a fixed income at what price point will they buy? If a young person, at their first job, wants to buy a house, what will they be able to afford? If a family needs a home in a good school district but is on a limited budget, where will they buy? In your marketplace, ask yourself, who is my biggest pool of buyers and where do they want to move if on a budget? We shop for deals in those price points and competitively price our flips. This is one of the reasons why people are drawn to manufactured homes.

So just to recap, here is what we are seeing and doing in todays market:

The deals are out there
Sellers may take a discount for confidence in an investors ability to fulfill
Inventory of houses for sale is LOW
Reduce your exposure and adapt
Communicate with your lenders
Step up your online selling tools like videos and photos
Diversify price points

I know that while our company is doing well, there are many others that were heavily effected. The real estate environment may be different in your marketplace but maybe you can take a few ideas and implement them into your business. We are all in this together. As business owners and entrepreneurs we are constantly navigating through uncharted waters. When things are in full swing again, let us not forget how easily the greatest economy in the world was hit with this blow. Try to always be a few steps ahead, continue to educate yourself, live, and love to the fullest.

Happy Investing,

Christy Duckett-Harris