I have a list I started with 10 things I never want to hear again, it’s actually longer now, but here’s my current top ten:
7. “we’re all in this together – apart” (UGH!)
6. “shelter in place” (as opposed to shelter not in place?)
5. “it’s with an abundance of caution…” (dear God!)
4. “in these uncertain times”
3. social distancing
1. Stay safe (thanks Captain Obvious!)
In my world, as I sit thru my third 2-week quarantine without being sick, but out of “an abundance of caution,” because I went somewhere near someone that may or may not have been around someone that could have had CoVid (AKA my coworkers won’t let me in the office) I have plenty of time to think about where the residential real estate investing market, the area that I have spent the better part of my adult life working in, is headed.
Are we going to see the market crash? Or see prices rise or fall? Will it be a Sellers or Buyers market? Interest rates – down or up? You can talk to 5 different people in the business and you will get 5 different answers. The fact is no one knows – “in these uncertain times” all we can do watch, wait and by all means pay attention and get ready.
Here are a few sobering facts for all of you interested in the residential real estate investment market. I share these because I think they are important things to keep your eyes on. Each market will react differently, so you need to pay attention to your intended market and how these items may affect it. Not just your geographic location, but what the segment of investment real estate you are interested in is doing. Whether it’s flipping single family homes or buying and renting multi-family – pay attention to the ‘symptoms’ of your intended market.
Right now, according to a June 26, 2020 article in Housingwire, as reported by Black Knight, “mortgage forbearances rose the last week of June after three weeks of consecutive declines.” So right now, at the end of June, 2020, we have approximately 4.6+ MILLION homeowners in the US not paying their mortgages. That’s 8.8% of all mortgages. Doesn’t sound so bad does it? 8.8%?
Consider this, in the combined years of 2009 & 2010, we had somewhere in the neighborhood of 5.5 MILLION foreclosures in the US. Split between the 2 years, that’s about 2.75 MILLION per year, give or take. If only ½ of the homes we have in forbearance now end up in foreclosure – well you can see how that would look. Some of the states that showed the highest rates of foreclosure back then, are also some of the states that are showing some of the highest rates of spikes in CoVId. Do the math. Economy struggles longer, forbearances end, payments are due…
Consider also this nugget – between 2006 and today, according to the US Census Bureau, we’ve added 34+ Million new Americans, that’s not really more than anticipated, however what’s shifting is the rental base. Of the top 50 cities in the US, 29 of them have flipped from the majority being owner occupied residents, to the majority being renters. This little bit of info has vast ramifications. We are seeing cities become more interested in appealing to the rental base of voters, than the owner base of voters. (Here’s a hint – Renter friendly cities attract renters.)
Now mix into this cocktail CoVid, or as I call it, The World Wide Pandemic knows as CoronaVirus 19, 2020! (I like to put my hands on my hips and puff my chest out when I say this) We have renters in the majority in many of our major cities with a free pass to not pay rent for a while. Take my state – Minnesota – no rents and no evictions right now. And it’s been this way for 3+months. As I manage almost 100 rental units in my real estate brokerage, Investors Realty MN, I can tell you from inside the bubble, most of my tenants are paying. In fact almost all of my tenants are paid up – so far. (We run a tight ship when it comes to collecting rents). However, I have heard from others in the industry there are real problems. Squatters, utilities not being paid, rents that are not covering expenses and landlords that are out of work. One of the less acknowledged issue as I see it, is that units that should have had rental increases these past few months, I can’t do anything with. Our supreme leader here in Minnesota is also not allowing rental increases, notices to vacate, late fees or anything else until the World Wide Pandemic is over. Which according to him could be never.
It gets cold here. We try to have most of our leases turn over in the warmer months of April – August, with 60 day notices. Meaning at this point, with our Supreme leader still in complete control, the earliest I could hope to raise rents or give notices could be the end of July if we are lucky. I could have a massive exodus of tenants at the end of the summer, but it’s looking like that could be extended. The tenants that should have had an increase, won’t get one until the end of the summer either, at the earliest. That is money that many landlords, who are struggling now, will never recoup.
I have personally fielded more than a dozen calls from landlords looking for advice and help. Many of them tell me their tenants are far behind in rent. Their forbearance is coming due in a month or two, and the pandemic seems to be lasting longer than we imagined. When Housing Court opens back up, lawyers are projecting months of backlogged cases. That’s months more of no rent, with a tenant in the unit, that landlords will never recoup. What can they do? I’ve even had a few attorneys call me asking my thoughts. Any great ideas? Nope – you can’t do anything. Just like CoVid – there is no magic pill here.
I know what you’re thinking, this sounds horrible. Why would anyone want to get involved in that? The rental market is going thru something it’s never been thru before. That’s all true. But here’s something else that’s true. Real investors wait for a market like this. All of these negatives, unfortunately, will cause massive chaos in the market. There will be foreclosures – this will add to the already burdened tenant base that we have. Not only will homeowners become renters after a foreclosure, but foreclosures will surely put many renters out on the street. There will be landlords that have struggled to self-manage their units for years, finally throw up their hands and sell the damn thing. And there will be tenants, with options and incomes, who are tired of ‘shared living’ in these ‘germy’ multi-family buildings with their CoVid stained door handles, longing for a quiet single-family home, in a suburb not too far from the action, where they can ‘shelter in place’ with their own germs.
Oh yes, there will be opportunity.
If you are that longing investor, who’s pined for years to get off the investing bench and get in the game – then get your helmet on, because you’re about to be called in. This is your time. God forbid we have another pandemic, we know from the Great Recession – any shift produces opportunity.
If I can give you any advice, first and foremost, if you are in Minnesota – for God’s sake call us to help you before you buy or if you are struggling now with investments. If not, maybe call us anyway. But be smart. If you don’t know what you are doing, get help from someone who does. Don’t make stupid deals. (I’ll cover those on a later blog). Don’t be an idiot. (Again – later blog). Get your money together, get your financing in order, get your shoes on and your team in place, because if you miss this one…well I hope to God we never see a situation like this again.
But above all else, Stay Safe!
Maureen McGarry is a Minnesota licensed Real Estate Broker and Co-Owner of Investors Realty MN. With almost 30 years in the business of buying, selling, investing, rehabbing and managing rentals, she’s seen a lot. Investors Realty MN focuses on helping investors buy and build their residential real estate portfolio. Call her if you want help!