This year has been tough in many ways, both personally and business-wise. The Corona Virus has not made real estate management very easy. Early on, we thought we would come through this pandemic quickly and virtually unscathed. We felt because we don’t carry mortgages on our rentals and our expenses are fairly low, we would not be squeezed for cash or be put in a financial bind if we had some tenants that could not pay us, and that has definitely helped us. For the first few months of the pandemic, everything was going well and our tenants were all paying as normal. I think that was partially due to the stimulus checks everyone received early on. By the time September rolled around, we had some tenants that had lost their jobs, been furloughed, or had their hours cut. This led to them falling behind on their rent payments. While simultaneously, the government has been issuing eviction moratoriums (which they keep extending). This means you have no recourse if a tenant cannot or chooses not to pay. We currently have several tenants that are 90 days past due and added two vacancies to our rent roll in late November. All this was a direct hit to our bottom line. We have tried to work with all our tenants. We have been flexible on payment schedules and we have waived late fees. We don’t want to have to evict anyone, but this is a business and our livelihood. While eviction is always our last resort, it is sometimes necessary to evict. I believe these eviction moratoriums will only push the problem down the road possibly creating an avalanche of evictions, and if a tenant knows you can’t evict it can empower them to not pay.
While all this is not good for our business, it could have been much worse. We have been extremely blessed, and I’m very glad we still are in a strong financial position, and even though our numbers are slightly down over 2019, we’re still making money. This is our first decrease in revenue in over 10 years, but I strongly believe 2021 will be a better year and we will get back on track.
2020 did not go as planned
At the beginning of 2020, we were planning on buying several properties during the year. We looked at many properties in January and February. One deal we were working on in March began to fall apart when the lockdowns began and our handyman suddenly quit. With everyone afraid of catching the virus, we couldn’t risk buying a property that needed a lot of repairs. We didn’t know how quickly we could get the work done, and we certainly didn’t want to tie up our money in a property that is just sitting vacant. Believing the pandemic would be over in a few months, we decided to try to ride out the pandemic and hold off on buying anything until everything gets back to normal. Now, almost a year later, this has yet to happen.
Over the last few months, we have started to look at a few properties again. Unfortunately, the prices over the last year have skyrocketed. Real estate inventory was already low, and now it is extremely low. The virus has delayed many new construction projects, caused existing sellers to pull their homes off the market, and induced potential sellers to hold off on listing their homes, thus decreasing the housing supply. Meanwhile, lower interest rates have added to the increased demand for real estate. This perfect storm of low supply and high demand has caused drastic increases in home prices. Thus making it extremely hard to find good investment deals. It doesn’t make sense to buy a property if we can’t make a good return on our investment. For example, we don’t usually buy a property unless we can get a monthly gross rental income of 1.5 - 2.0% or better. That means if we buy a property for $100,000 it needs to rent for $1500 per month or more to make it a good investment for us. What we’re seeing now is the small distressed houses that we were able to buy and fix up for a total of $35 - 55k and rent for $600 - $700 per month are now selling for over $100k. This makes the numbers impossible. In the past, we have been able to make an 18% -24% annual return. Paying $100k for a house that would still only rent for $600 is only a 7.2% annual return. For the amount of time and money required to find, fix, and rent a property, it is not worth the risk for us. It would take us almost fourteen years to get all our money back from the investment.
The real estate market, like all markets, goes through cycles. Right now I believe we have been in a fast-rising market for the last couple of years and we may be reaching the top of the cycle soon. I don’t see how housing prices can continue to rise at 5 - 10% per year when the average cost of living has only been rising at 1 - 3% per year. If incomes don’t rise as fast as home prices at some point, the market will begin to cool, and/or the bubble will pop!
Making money in a hot rising market!
Here are several strategies to make money in a fast-rising real estate cycle:
- Fix and flip houses - If you are able to move quickly and take advantage of the rising property values, you should be able to buy, fix, and flip while still making a decent profit.
- Wholesaling strategy - Wholesaling properties using assignment contracts would eliminate some risk because you are not investing your money, you’re only flipping paper.
- Buy for appreciation - This approach means you assume the market will continue to go up, allowing you to pay more for a property because you believe you will make money when you sell the property or when the rent rates increase over time.
- Dollar-cost strategy - Dollar-cost averaging your real estate portfolio by continuing to buy properties at all price levels as the market rises and falls, this would be equivalent to dollar-cost averaging a stock portfolio.
Regardless of market conditions, we will continue to look for investment properties to buy. It may take longer to find a deal, but I believe in any market there are always deals to be found.