6 Lessons Learned with $2.8 Billion of Real Estate During COVID

Six Lessons Learned with $2.8 Billion of Real Estate During COVID

Jillian Helman of RealtyMogul was one of the speakers featured at this year’s Best Ever Conference. RealtyMogul has purchased over $2.8 billion in real estate. In her presentation, she outlined the top lessons she learned managing a massive portfolio of properties during the COVID-induced economic recession.

Lesson #1. Play defense before an economic crisis, not during a crisis

The first lesson is to make the proper preparations before an economic crisis occurs. Investors who are typically affected the most by economic recessions were too aggressive during periods of economic expansion.

The single most important defensive tactic to implement prior to a recession is conservative underwriting. Do not do deals that fail to meet your underwriting criteria. Do not make aggressive revenue growth assumptions based on historical natural appreciation trends or forecast reports. Do not assume a cap rate at exit that is equal to or less than the cap rate at purchase.

Two other defensive tactics Jillian follows prior to economic crises are having a strong property management team in place and having open conversations with lenders to ensure they pick up the phone during a recession.

Lesson #2. The proforma is always wrong

Not only is the proforma provided by the listing broker incorrect, but your yearly income and expense budget is also always wrong. Prior to submitting an offer on an opportunity, you must make a lot of underwriting assumptions. Many of these assumptions are confirmed or adjusted during the due diligence phase. However, there are always unknowns, which means your proforma is never 100% accurate.

Therefore, when creating your proforma for a new investment, Jillian recommends the following:

First, have a minimum contingency budget of at least 10%. For example, if you expect to invest $10,000 per unit, include a contingency budget of at least $1,000 per unit.

Second, scale back the number of units you expect to renovate and lease. Have a conversation with your property management company (or whoever is overseeing the renovations) to set a timeline they can stick to and assume an even more conservative one.

Third, assume an exit cap rate that is 1% greater than the cap rate at purchase. In doing so, you are assuming the market will be worse off at sale than at purchase. If it improves, great. You will exceed your return projections. However, if there is an economic crisis, you have already taken that into consideration in your underwriting.

Last, do a sensitivity analysis. In a sensitivity analysis, you vary certain metrics to determine how it affects the returns. For example, if you increase stabilized vacancy or bad debt (two metrics that change during recessions), does the deal still meet your investment criteria?

Lesson #3. Take a breath and be deliberate

No matter how much preparation and defense you play prior to an economic crisis, it is still a stressful experience once one occurs. That is why it is important to relax, determine what your top priorities are, and focus on those.

During COVID, Jillian’s top priorities have been the health and safety of the residents and her team, keeping occupancy up, and shoring up cash reserves. This involved taking a deep breath and deliberating to determine how to best focus on these priorities. For example, she decided to halt renovations, rent increases, and all nonessential repairs to shore up cash reserves and maintain occupancy.

Lesson #4. Don’t be afraid to innovate

Economic crises almost always require quick changes and adjustments to acquisition and asset management strategies. The COVID-induced crisis is no different.

The greatest change for most investors because of COVID has been the use of technology to show units to prospective residents. For example, Jillian (and many others) began using virtual, self-guided tours. Here is a blog post with a few other uses of technology in multifamily investing that are currently being used.

The point is that oftentimes changing your investing strategy is required during recessions.

Lesson #5. Do experiments and test the market

When innovating and making changes, experiment with different strategies to see what works best.

In the example above where Jillian experimented with virtual tours, the conversion rate was higher than in-person tours with a leasing agent. Since the experiment worked, she doubled down.

Therefore, double down on innovations that work, and quickly stop experiments that don’t.

Lesson #6. Be a stellar communicator

During periods of economic expansion, it is possible that many investors never reach out. If they receive their distributions in the right amount and on-time, they are happy. However, even if the distributions aren’t affected, expect more investors to feel concerned during a recession.

To proactively address these concerns, consistent communication is key. Jillian transitioned from quarterly updates to monthly updates. In these updates, she included steps they were taking to proactively address any operational challenges, like dips in occupancy or collections. She also expressed their availability to investors who had any questions or concerns.

You should strive to be a stellar communicator all the time, but even more so during economic crises.

Lessons Learned During COVID

Most of the work required to survive an economic crisis happens during the previous period of economic expansion. This starts and ends with conservative underwriting.

Once the crisis hits, take a breath and determine your priorities. If change is required, test different strategies and double down on what works. Also, make sure your passive investors are top of mind and keep them in the loop on what you are doing to conserve their capital.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
6th Circuit Court of Appeals Strikes Down Eviction Moratorium

6th Circuit Court of Appeals Strikes Down Eviction Moratorium

On March 29, 2021, the United States 6th Circuit Court of Appeals denied HUD’s efforts to unilaterally extend the moratorium on evictions. But what does this mean? In short, the 6th Circuit Court of Appeals (covering Tennessee, Kentucky, Ohio, and Michigan) ruled that the Center for Disease Control (CDC) could not lawfully extend the moratorium based on the “generic rulemaking power arising from the Public Health Service Act.”

In September of 2020, a group of landlords in Memphis, Tennessee sought relief from the United States District Court for the Western District of Tennessee. In doing so, they sought to have the Halt Order (for evictions) declared to have exceeded the authority granted to an administrative agency. Judge Norris ruled that the Halt Order exceeded the authority granted to it and the government appealed and sought a stay of that order. A “stay” is a procedural mechanism whereby the Court can hold an order or its effects from taking place. However, a court must determine if the stay meets the four factors the law requires of it to be used to halt an order and its effects. In this case, the higher court did not find that the stay should be granted because the Government was not likely to be successful on the merits of its case. They did so based on statutory construction of the statutes that the CDC sought to extend the moratorium.

What does this mean for the rest of us?

Great. What does this mean for the rest of us? This means that under the current statutes being used as the basis for extending these moratoriums, the CDC has overstepped its authority. This does not mean that Congress cannot pass a bill to give the CDC that authority. This is easily boiled down to a check on government overreach. It is also of note to mention that the moratorium that was being challenged ends on March 31, 2021. This is a small victory for landlords but it is not a tidal change in the current legal system that has left so many investors and landlords with tied hands. The coming weeks will be worth watching Congress as this issue is lobbied on Capitol Hill.

Author: Brian T. Boyd, JD, LLM, www.BoydLegal.co

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

Difference Between 2008 and Coronavirus Pandemic on Real Estate Investing

Difference Between 2008 and Coronavirus Pandemic on Real Estate
During a recent conversation with Joe Fairless, Chris Clothier discussed the differences between the 2008 real estate market crash and the coronavirus pandemic’s effect on the real estate market. Clothier, one of REI Nation’s partners, owns between 12 to $15 million in residential holdings and commercial real estate. This article is based on the information shared by Clothier during the interview.

REI Nation

In 2003, Clothier’s family started a company called Memphis Invest in Memphis, Tennessee, and later rebranded it as REI Nation. REI Nation currently manages a $100 million portfolio consisting of over 6000 single-family homes. The company operates in Tennessee, Texas, Oklahoma, Arkansas, and Missouri. Most REI Nation clients engage in passive investing, not wanting anything to do with the day-to-day property management.

The 2008 Real Estate Market Crash

In 2008, some people invested in real estate properties that were not qualified and over-leveraged. These transactions created an unsustainable inflated value of properties. Bear Stearns became one of the earliest casualties of the mortgage crisis that led to the 2008 market crash.

Fannie Mae changed its practices of financing investment properties, reducing the number of properties that a person could finance from ten down to three. Therefore, an active investor who was investing in ten properties could only fund three of them, causing them to cancel the other seven. The canceled transactions were the beginning of what eventually turned into a full-blown crisis in the housing market.

The Coronavirus and the Real Estate Market

The problem created in the current real estate market comes from a mixture of bad news and fear. No one has seen the actual impact that the Coronavirus will have on the market yet. The determining factor will be how rent and mortgage reductions will affect the market. Within weeks after the Coronavirus appeared, investors went from full occupancy in their rental properties to collecting percentages of rent. With the 2008 market crash, investors were able to see it coming, giving them time to prepare. However, the pandemic appeared suddenly.

Planning for the Unexpected

The best thing any investor can do during a market crisis is not rush but to take time to analyze what is happening. The message REI Nation sent to their 2000 clients is that they were preparing daily.

In 2008, there were so many things happening that you had to have a backup plan. Then you needed a backup plan to the backup plan. It didn’t matter if you were the landlord over several properties or a small business owner. Because things were so uncertain, you had to try and plan for every possible scenario.

REI Nation planned as best as it could. No one expected there to be a global pandemic. How could they? However, when involved in active investing, you must have a contingent plan on how to operate in the event something goes wrong.

When you have spent the time planning for the unexpected, you can be confident in your actions. Preparing for the unexpected helps to place investors in the best possible position under any type of circumstances.

Treatment of Tenants During the Pandemic

At the beginning of the pandemic, there was no reason for REI Nation to contact the residents to tell them anything. All residents knew their rent was due on the first of the month, which did not change. So, there was no reason to generate any mass statement about what REI Nation expected.

However, REI Nation did communicate with their residents on an individual basis when they contacted them about their particular situation. They provided residents having hardships with a resource list of places they could turn to for help. When residents could not pay the total amount of the rent, they encourage them to pay what they could. That way, REI Nation could tell the owners that the tenant was doing their best to meet their obligation.

The pandemic entails more than just not paying the rent. Tenants who live in apartments had to abide by rules regarding the use of amenities and social distancing.

Some companies gave their tenants a blanket discount of 15% off their rent. REI Nation did not do anything like that because everyone was not having issues with paying their rent. Over 30% of REI Nation’s residents paid on time. Many of the residents paid early because their bank automatically debits their payments.

REI Nation has a fiduciary responsibility to its owners to make sure they act in their best interest. Therefore, they could not treat all cases the same. In some instances, REI Nation had to work with the tenants. They offered some tenants discounts or asked the owners to work with them.

REI Nation expected the tenants who could pay their rent to do so. Then, they worked with the ones who were not able to pay. For example, if a tenant presented a verifiable hardship and made an effort by paying 10% of the rent, that left 90% unpaid. Even in that scenario, REI Nation handled it on a case-by-case basis.

The company’s goal was not to put anyone out of their home or in further hardship. They also did not want to send a message to all tenants that they did not have to pay their rent. Either on their own or with the help of financial assistance, the tenants paid what they could. Many owners who knew their tenants contributed what they could afford accepted that their revenue for that month would be slightly less.

When Will Investors Notice the Market Effect?

In the future, investors can expect foreclosures on a variety of properties in different neighborhoods. Vacancies will increase, and rents will decrease. During the crisis of 2008, investors saw the effects that the real estate crisis had on the market by 2009 and 2010. Within two years, the 2008 market fall affected everyone.

The coronavirus crisis is entirely different than the one in 2008. However, financially, it’s about to become difficult for people to stay in their homes and avoid foreclosure and evictions. It’s unavoidable. It took about two years for it to happen back then, and it will probably be the same now.

With the Coronavirus, investors know that it is something the country will get through. The faster that happens, the more negligible effect the Coronavirus will have on the number of foreclosures and where they occur. Most likely, an adverse impact on the real estate market will not be widespread. However, the longer the Coronavirus goes on, investors might see damages coming six to nine months down the road.
Hope Versus Uncertainty

The difference between what’s occurring during the Coronavirus and what happened with the 2008 crisis is hope. After the 2008 crisis, there was a fire sale of properties. It should not be that bad after the Coronavirus. During the Coronavirus, some people saved their money, anticipating things to correct themselves. They had no idea the current situation with the virus would exist. If there are distress properties, there will be a lot of competition for them. In 2009 and 2010, there wasn’t any competition for distressed properties because of the economy’s uncertainty.

Any active investor who survived 2008 would advise new investors to expect future investment opportunities. However, no one is hoping for people to have to liquidate their properties. Most people involved in active investing are hoping for a calm recovery and the ability to get out of the crisis without high losses. A person who’s interested in investing in real estate should practice good fundamentals. They should know they can always find good deals and don’t have to hope for a massive crisis to make huge profits.

Planning Is the Key

Everyone should have a plan. Regardless of what stage of the process an investor is at, they must always start planning for the worst-case scenario. It would help if they frequently communicated with their lenders and clients. If there are any lessons from the Coronavirus, it is that no one is in control. No one knows what is coming next in passive investing. So, it is wise to plan for every possible scenario. Having a plan and executing that plan is what will get you through any crisis. It worked during 2008 and 2009, and it will work today.

REI Nation did not have to rush to develop a message to communicate to their clients. That’s because they had already started a regular practice of keeping their clients informed. For the past twelve years, they spoke with their clients to let them know their investment status. When it was necessary to put out a specific message, they placed a video on their website. REI Nation’s handling of the market during the coronavirus crisis thus far can be an example to others involved in active investing.

REI Nation has a blog and video series for investors on its website. The information is available for free to anyone who wants to view it. Clothier is active on social media and sites like BiggerPockets.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

Webinar Recap: Looking to Note Investing in the Global Health Crisis

The performance of real estate notes was a bellwether for the economy in the last recession, so in this Best Ever Webinar we explored the performance of 1st position and 2nd position notes, how the market has been affected by COVID, and what the data indicates about the real estate market at large.

As a servicer of tens of thousands of first position notes, Jorge Newbery pointed to the $4MM loans currently in forbearance, which are on the precipice of foreclosure after government intervention comes to an end.

The counterargument speared by Kathleen Kramer was that the $4MM homes don’t represent the volume of homes in trouble, but in part those taking advantage of the situation. She also pointed to all-time highs in homeowners equity relative to average debt amounts and record low interest rates that could allow troubled homeowners to be bailed out by refinances.

Jim Maffucio added that we see the unemployment rate dropping and average HHI of homeowners being significantly higher than the last recession where subprime mortgages were provided to low wage earners.

Regardless, all agreed that the amount of unpredictability in the future has returned to normal along with pricing for notes, suggesting that for the time being the market has an optimistic outlook on the future of residential real estate.

What the future holds for commercial notes is a larger question with retail and hotels going to double digit CMBS special servicing rates. Will there be opportunity to buy distressed office notes? Whispers of the opportunity are just beginning and it could be too early to see what the future holds.

Watch the on-demand playback of this webinar and past webinars on our conference platform NOW! Our networking has started for this year’s Best Ever Conference, don’t miss out! Use code WINNERS30 for 30% off your ticket here.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

Where Investors Did (And Didn’t) Buy Multifamily During the COVID-19 Pandemic

Transaction volume up over 50% in Pittsburgh, San Jose and Stamford, CT only other cities with increased volume

Each year, Integra Realty Resources (IRR) releases their “Commercial Real Estate Trends Report.” Based on long-term and short-term historical economic trends, IRR attempts to forecast how each commercial real estate sector will perform in the coming year.

According to the Federal Reserve Bank of St. Louis, which is responsible for dating recessions, the economy entered a recession in February 2020. And as of this writing, FRED has yet to call the end of the recession.

One dataset included in IRR’s annual trends report is the transaction volume during the prior year. Since the market was in a recession most of last year, the 2020 transaction data provides us insights into where commercial real estate investors were buying up multifamily during a down and uncertain economy. Maybe even more insightful are the markets where investors WERE NOT buying multifamily in 2020.

As a baseline, according to the report, the total multifamily transaction volume in 2020 was down 40% year-to-date, although it still had the highest total transaction volume of the other commercial real estate industries. Only three markets experienced an increase in multifamily transactions in 2020 – Pittsburgh, San Jose, and Stamford, CT. The greatest increase was in Pittsburgh with over 50% more transactions in 2020 compared to 2019, making it one of the “hottest” multifamily market in 2020.

Every other market analyzed experienced a decrease in transactions in 2020. However, some markets more than others. In five markets, the transaction volume in 2020 was down by over 50% – Cincinnati, Inland Empire, Hartford, Cleveland, and Philadelphia.

 

Here are the 10 markets with the greatest increase in multifamily transactions in 2020:

1. Pittsburgh, PA

  • YOY Change: 53.8%
  • Total (4Q2019-3Q2020): $855.7M
  • Volume Rank:39

2. San Jose, CA

  • YOY Change: 11.7%
  • Total (4Q2019-3Q2020): $1,913.3M
  • Volume Rank: 22

3. Stamford, CT

  • YOY Change: 10.3%
  • Total (4Q2019-3Q2020): $440.9M
  • Volume Rank: 50

4. Kansas City, MO

  • YOY Change: -4.4%
  • Total (4Q2019-3Q2020): $1,063.6M
  • Volume Rank: 34

5. Memphis, TN

  • YOY Change: -5.6%
  • Total (4Q2019-3Q2020): $509.3M
  • Volume Rank: 48

6. Seattle, WA

  • YOY Change: -6.5%
  • Total (4Q2019-3Q2020): $5,524.9M
  • Volume Rank: 4

7. East Bay, CA

  • YOY Change: -7.8%
  • Total (4Q2019-3Q2020): $2,079.2M
  • Volume Rank: 21

8. Sacramento, CA

  • YOY Change: -8.9%
  • Total (4Q2019-3Q2020): $1,384.2M
  • Volume Rank: 28

9. St. Louis, MO

  • YOY Change: -12.7%
  • Total (4Q2019-3Q2020): $649.6M
  • Volume Rank: 45

10. San Antonio, TX

  • YOY Change: -13.4%
  • Total (4Q2019-3Q2020): $2,139.7M
  • Volume Rank: 20

Here are the 10 markets with the greatest decrease in multifamily transaction in 2020.

City YOY Change Total (4Q2019-3Q2020) Volume Rank
Manhattan, NY -46.6% $3,820M 8
Baltimore, MD -47.3% $1,1775.5M 32
Long Island, NY -48.3% $469.5M 49
NYC Boroughs -49.0% $2,656.5M 15
Washington, DC -49.8% $795.2M 41
Cincinnati, OH -59.3% $272.5M 52
Inland Empire, CA -60.4% $1,035.4M 35
Hartford, CT -63.2% $109.6M 54
Cleveland, OH -66.9% $240.2M 53
Philadelphia, PA 69.4% $1,013.4M 36

 

An interesting takeaway from this data supports something we talk about here a lot on the Best Ever blog: commercial real estate is very submarket and neighborhood dependent. All three top ranking cities are in the same state as a bottom ranking city (Pittsburgh and Philadelphia, San Jose and Inland Empire, Stamford and Hartford). Therefore, before making an investment decision, you need to continue to perform a high level analysis on a submarket and neighborhood level, rather than focusing on city and MSA level data. However, reports such as these can be a guide to determining which cities and MSAs to research further.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

January’s Free Webinar on The Future of COVID-Affected Asset Classes

Covid-19…we all hate the word now. Not that we didn’t before. But, as investors, the multifaceted challenges just keep piling up. If you are in trades, Pfizer and Moderna are probably a good bet. but for us? In real estate? Where should we place our bets? 

With the vaccine, many are expecting to show an increase of earnings. Does that include real estate? What about the US dollar? Commodities? Bonds? 

The widespread economic hardship caused by Covid-19, and the growing dread of it ever truly going away, is crippling. With a vaccine now in place, many are shuffling and preparing for a recovered marketplace and an uptick in the economy, as, hopefully, they should. 

How does this affect the different asset classes? The main focus for our webinar this month is Assisted Living, Retail, and hospitality. These sectors have been hard-hit by Covid and we turn to experts in the field to give a glimpse into their realities and what they feel the future looks like in a Covid-19/post Covid-19 era. 

You should join us as we sit with co-founder of Accountable Equity, Josh McCallen, Dusty Batsell, Executive Vice President of Real Estate for Baceline Investments, and Loe Hornbuckle, CEO of The Sage Oak Boutique Assisted Living and Memory Care. 

Register and join us live here.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

COVID-19 and Apartment Rents: Best and Worst MSAs (end Q3 2020)

Each month, Apartment List releases a National Rent Report, which tracks rental transactions across the country.

In this blog post, which will be updated each quarter, I will do a deep dive into Apartment List’s data to rank the markets (MSAs) with the greatest increases and decreases in rental rates.

As a benchmark, here is the is the national level rent data (as of October 2020):

Of the 192 MSAs analyzed, rent is down in 40 MSAs (20.8%) since March 2020. Of the 40, 25 MSAs experienced a reduction in rent greater than the national average. In 5 MSAs, rents fell by double-digits.

For the largest MSAs, California dominates the list of top markets with the largest rent decreases. Since March, rents dropped by 14.8% in the San Jose MSA, 13.7% in the San Francisco MSA, and 4.3% in the Los Angeles MSA.

Below is a summary of MSAs with rent drops greater than 1% in March 2020:

 

Rent has grown in 152 MSA (79.2%) since March 2020. Of the 152, rent has grown by 3% or more in 76 MSAs, and double digits in 3 MSAs (all three we smaller MSA – Dover, DE, Lake Charles, LA, and Poughkeepsie-Newburgh-Middletown, NY). The largest MSA with the greatest rent growth is Boise, ID at 8.2%.

Below is a summary of the MSAs with rent growth greater than 3% since March 2020.

Click here to download the raw data in Excel for Q3 2020, where you can find the same information on other MSAs, as well as on the county and city level.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

47 Recessions and Counting – Are You Prepared?

Did you know the United States has had 47 recessions dating back to the Articles of Confederation? The first started not long after the revolutionary war. In the 1800s a recession would occur every 3-4 years on average and in the 1900s they began to occur about every 4-5 years. 

In 1913 the Federal Reserve was created and the US Government began experimenting with trying to stop recessions from happening. Sadly, they have been unsuccessful in stopping them; however, the good news is we now only have recessions every 10 years or so… what a relief.

Why Not Prepare?

Stoicism (an ancient philosophy founded in early 3rd century BC) teaches us that there are things in life in our control, and there are things which are out of our control. The key is to focus on what we CAN control. What the government will propose, how the stock market will perform, and what the Federal Reserve will do are primarily out of our individual control; however, you and I can control our behavior, decisions, and actions. Therefore, we can take action and decide to be prepared. 

PS – if you haven’t read my blog Stoicism & Real Estate – How To Be A Stoic Investor check it out HERE

There Are Two Types of Preparation to Consider

  • Personal – (Health, Safety, Food, Water, Shelter) 
  • Financial – (Diversification, Multiple Income Streams)

Personal Preparation 

In the last recession 2008-2009 over 6,000,000 people lost their homes and jobs as their 401(k)s disappeared into the abyss. Though in terms of personal preparation, many Americans had a “Plan B”. Many doubled up living with friends, relatives or found places to rent. For the large majority, food, water, shelter, safety and health were not the biggest challenge; this was a financial crisis.  

Financial Preparation

When COVID-19 hit the United States financial sector this past March, the stock market collapsed. What did people do? Most ran to grab toilet paper, food, water, and gasoline. How many people ran to buy stocks at a 30% discount? 

Statistically speaking, Americans hit hardest by The Great Recession and this year’s Coronavirus Recession only had one source of income; a job. Imagine only having one source for water. What would happen if that source were taken away? Because of this possible risk, we have hundreds of sources of water in the United States from rivers, aqueducts, rainfall, underground springs, imported bottled water and so on. So why not create multiple income sources to prepare for the risk of having one single source taken away? Having one income stream going into a recession means you are vulnerable and potentially unprepared for what could happen. Even the best economists in 2019 did not predict a Worldwide shutdown in 2020. 

The Solution 

Whether we experience a quick recovery or a multi-year recession in the years ahead, there will be another recession around the corner and many more throughout our lifetime. We can’t avoid them from happening and it doesn’t help to get angry when they occur. The best thing we can do is be prepared and create multiple income streams, so we have a safety net in the event that 6,000,0000 more people lose their homes or jobs the next go-around and we find ourselves among the unlucky ones. 

Never depend on single income. Make investments to create a second source – Warren Buffett

The average millionaire has 7 sources of income – Fact

To Your Success

Travis Watts 

 

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

The CDC Eviction Moratorium – What You NEED To Know

You may have seen recent headlines referring to an “eviction crisis”: 

The COVID-19 Eviction Crisis: an Estimated 30-40 Million People in America Are at Risk – The Aspen Institute 

 

Experts fear the end of eviction moratoriums could plunge thousands of people into homelessness – CNBC

President Trump signed an eviction moratorium order that effectively bans evictions nationwide through the end of the year. According to the Centers for Disease Control and Prevention (“CDC”), the moratorium order has been issued to provide housing stability and to prevent the further spread of COVID-19. However, it is important to note that rent is NOT cancelled through the end of the year. Let’s dive into how this order effects landlords and owners of real estate…

 

According to the moratorium, there are stipulations in order to receive this “eviction protection.”

Those who are eligible must meet additional criteria before presenting their landlords with a declaration, which will be made available on the CDC website. This criteria includes: 

  1. The resident has sought all available government rental assistance
  2. The resident will earn no more than $99,000 in 2020 (or $198,000, if filing jointly)
  3. The resident can’t pay their rent in full due to a substantial loss of income 
  4. The resident is trying to make timely partial payments, to the extent they can afford to do so
  5. The resident would, if evicted, likely end up homeless or forced to live in a shared living situation

What to do if you (the landlord) receives a CDC Declaration from a tenant?

 

According to Colton Addy from Snell & Wilmer Law, if a landlord receives a CDC Declaration from a tenant, the landlord should respond in writing to the tenant to encourage the tenant to make partial payments of rent (and similar housing-related payments) to the extent the tenant is able, in accordance with the CDC Declaration. Additionally, the landlord’s written correspondence should remind tenants that the rental amounts are not forgiven and will ultimately need to be paid. 

 

Additionally, many tenants may not be aware of the government assistance programs that are available to tenants to help tenants pay their rent during the COVID-19 Pandemic. Landlords should include a list of available resources that tenants can use to pay their rent. The Department of Housing and Urban Development (HUD) has stated that nonprofits that received Emergency Solutions Grants (ESG) or Community Development Block Grant (CDBG) funds under the CARES Act may use these funds to provide temporary rental assistance to tenants. 

 

The following websites provide information on federal assistance that is available:

 

www.hudexchange.info/programsupport

https://www.hud.gov/coronavirus

https://home.treasury.gov/policyissues/cares/state-and-local-governments 

 

Additionally, landlords should include other programs that may be applicable in their jurisdiction. Landlords may also consider filing an eviction proceeding for one of the reasons permitted by the CDC Order, but landlords should use caution in pursuing such actions as eviction proceedings in the current climate are likely to draw additional judicial scrutiny.

 

Penalties:

 

The penalties for individuals who violate the Order are severe, including:

 

 

  • A fine of up to $100,000 and up to one year in jail, if the violation does not result in a death; or
  • A fine of up to $250,000 and up to one year in jail, if the violation results in a death.

 

The penalties for an organization violating the Order are even more severe.

In summary, the moratorium order provides temporary relief to those residential tenants facing eviction who submit the required declaration, through the end of the year.  The order, however, does not absolve a tenant from paying rent or restrict a landlord from applying penalties, interest, or late fees on the tenant’s account for non-payment of rent.  Additionally, the order does not relieve landlords of their debt service obligations if a tenant seeks relief under the order. 

 

Disclaimer: The materials contained in this blog post are for educational and informational purposes only. Nothing in this blog post is to be considered as the rendering of legal advice. Readers are advised to obtain legal advice from their own legal counsel. Additionally, please note that the orders and laws related to the COVID-19 Pandemic are changing on a daily basis and your jurisdiction may have stricter rules related to evictions in place. Please verify the rules currently affecting your property at any given time.

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

President Trump Signs Coronavirus Relief Executive Orders

President Donald Trump signed an executive order on Saturday night after negotiations reached a deadlock in the House over another coronavirus relief package.

Click here to read the full memorandum.

Here is everything you need to know about the executive orders:

Unemployment Benefits

Unemployment benefits include an additional $400 per week, retroactively starting August 1st. The federal government would contribute $300 and the states would contribute $100.

White House economic advisor Larry Kudlow said Sunday that people could expect checks in a couple of weeks.

Eviction Moratorium and Renter Assistance

The executive order did not provide specifics on a renewed eviction moratorium or renter assistance. Instead, it defers to other governmental agencies to make that determination.

The decision to ban evictions will be decided by the Health and Human Services Secretary and Centers of Disease Control and Prevention Director.

The decision to provide financial assistance to renters will be decided by the Treasury Secretary and Housing and Urban Development Secretary.

Student Loan Payment Deferrals

Student loan debt interest would be waived through the end of the year. This only applies to loans held by the Department of Education, so it does not apply to privately held student loans.

Payroll Tax Cut

The federal tax withholding for the payroll tax would be deferred (not forgiven) starting September 1st and through the end of the year for people earning less than $100,000 a year.

The Treasury Secretary may also exercise his authority to defer the withholding, deposit, and payment of the tax, meaning it may be forgiven. He could also extend the program for a full year.

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

How COVID-19 Has Impacted June Rent Collection for Landlords

When COVID-19 made national headlines in mid-March, many real estate investors speculated that the worst was yet to come. The expectation was for rent collections to worsen month-over-month, with the biggest impact occurring in the early summer months of June and July.

Last month, we gave an update on the May rent collection numbers, which you can read here.

In short, rent collections by the end of week May 6th were down less than 2% compared to 2019 and rent collection increased from April to May. This data indicated that the worst was behind us.

Do June rent collections indicate the same?

According to a new national survey of multifamily residents by J Turner Research, 90.3% of respondents said they expected to pay their June rent by the end of the month.

Of the 90.3%, 84.3% said they expect to pay their June rent by the 10th, which is a 5% increase from the same time in May. The remaining 6% said they expect to pay by the end of the month.

Of the 84.3%, 74.6% said they expected to pay rent on time (compared to 70% in May) and 9.6% said they expect to pay by the 10th.

Only 9.6% of respondents said they did not expect to make their rent payment for June (compared to 14% in May).

Overall, compared to April, more residents expect to pay rent on time, by the 10th, and by the end of the month.

 

Source: J Turner Research

 

Keep in mind that this is only a survey and not actual rent collection data. However, J Turner’s May rent collection predictions were extremely accurate. They predicted rent collection early in the month of May to be 80.8%. The actual rent collected by May 6th was 80.2%.

Joseph Batdorf, the president of J Turner Research (the firm that conducted the survey) is quoted as saying, “If our numbers are as on target as last month, rent receipts will be stronger than May, which bodes well for the industry.

 

Another key finding was how respondents prioritized their expenses. Rent payments were the number one priority, over car payments, utilities, and even groceries. This is something I’ve talked about before – the last thing people stop paying is their rent. So the findings of this survey reinforces that concept.

 

To stay up-to-date on the actual month-to-date rent collections, I recommend bookmarking the NMHC Rent Payment Tracker, which you can find here.

 

The April-to-May-to June rent collection trends are great news for apartment investors. However, according to NMHC President, “the hardships caused by the outbreak are not ending anytime soon.” Therefore, it is important to stay up-to-date on new rental assistance legislation, local eviction laws, and continue to stay in contact with your residents in order to understand their ability to pay rent on time.

For more reading on how the coronavirus is impacting real estate, click here.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

How COVID-19 Has Impacted May Rent Collection for Landlords

COVID-19 has caused a lot of uncertainty for landlords and property managers over the past few months, especially with the recent changes to rent collections and evictions. In an attempt to help tenants who may be struggling financially, many states are beginning to restrict evictions during the pandemic. For landlords, this can be scary as it may translate to less rental income with no ability to evict and find a new tenant.

Changes in rent collection during COVID-19 are expected. However, recent rent collection data shows landlords may not be as impacted as they initially expected.

In fact, data shows that rent collection is down by a few percentage points. While new eviction laws may be scary for landlords, the data shows it is not as bad as it seems.

Here’s what you need to know about COVID-19’s impact on rent collection for landlords:

Rent Collection is Down

Understandably, rent collection has dropped – but this was expected. Going into a recession of any kind means people have less money. Sometimes, this even means missing rent payments.

Luckily, rent collection hasn’t been affected as much compared to previous economic downturns. In fact, as of May 2020, rent collection is only down 1.5% from May 2019.

Better yet is that data shows rent is up over 2% from April of 2020, which also indicates  landlords may not see a massive decrease in rent collections.

As for rent collection percentages, 80.2% of tenants paid rent by the end of week May 6th, 2020. This is only a 1.5% change from the 81.7% of tenants that paid rent by the end of week May 6th, 2019.

Source: National Multifamily Housing Council

Year to date, rent collection is down a total of roughly 3% from 2019, but this is promising. For the time being, the spread of the virus seems to be slowing down. Additionally, steps are being implemented to get the economy rolling again, meaning in the short-term, the worst may be over.

Of course, we don’t know any of that for a fact yet, though. What we do know is rent collection is down only slightly – a good sign for landlords.

Why is Rent Collection Down So Little? Will it Get Worse?

The obvious reason for this is government stimulus checks are finally hitting bank accounts. With many stimulus checks making their way to citizens towards the end of April, it makes sense tenants are able to pay rent.

Of course, as of now this is the only stimulus check confirmed for Americans. There have been talks from President Trump about distributing a second round of stimulus checks, though. The main reason for this is because data shows that 63% of Americans will require a second stimulus check in order to pay bills within the next three months.

Depending on whether the economy reopens, the next few months could prove to be unstable. The good news is many states are ramping up unemployment help efforts, as nearly 15% of the country is unemployed.

With all the federal and state help citizens are receiving as of currently, it is likely rent collections won’t fluctuate too much. Again though, none of this can be said for certain.

Eviction Routines are Changing

Perhaps more important to know than the current rent collection numbers are the change in evictions laws. While not all states have implemented new evictions laws, many states have – and they are important to know.

Take a recent case in Minnesota, for example, where a landlord was charged for evicting a tenant during the pandemic.

States are beginning to require landlords to allow tenants to live in their property even if they cannot pay rent. As of now, there are 15 states which have suspended or changed eviction laws until further notice. Each state’s new eviction suspension is different, so be sure to stay updated on your current state’s eviction laws.

Most states who have changed their eviction laws require landlords to keep tenants in their homes even if they cannot pay rent. New York, for example, declared an eviction and foreclosure moratorium and prohibited late fees for up to 90 days, even allowing tenants to use their security deposits to pay past rent.

Luckily, these changes have clearly not changed rent collection too much – yet. But it is still something that should be prepared for. At the very least, be willing to work with tenants during this difficult time. Even if you are able to evict tenants, finding new ones during this time may not be easy.

Remember – It’s Temporary

Though we don’t know when, the economy will recover. In fact, real estate investments like apartment investing may even come out of the recession stronger than before.

While rent collections have been slightly affected, it’s nothing too concerning as of now. Just be sure to stay on top of your states’ eviction laws and suspensions during the pandemic and prepare accordingly.

For more reading, c to find out what you can do to help “recession-proof” your real estate investments during a recession.

 

 

 

 

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

You Shouldn’t Do Deals During the Coronavirus Pandemic: Multifamily Myth Debunked

Let’s debunk another multifamily myth.

Click here to read my debunking of another common money-raising myth – that you need a strong track record in multifamily to raise money.

The myth I will debunk in this blog post is “I shouldn’t be doing any apartment deals until the coronavirus pandemic has passed.”

The key word is apartment deals. This blog post will focus on how you can continue to do apartment deals during the coronavirus pandemic.

My company recently renegotiated an apartment deal that we placed under contract before the coronavirus pandemic. My consulting clients are still actively looking at deals and putting them under contract. Active investors I have spoken to on my podcasts are still doing deals.

In fact, many active investors I have spoken with who raise money for their deals are saying that they are seeing an increase in demand. With the amount of uncertainty in the stock market, people are looking at passive real estate investing as an alternative.

What is allowing investors to continue to do apartment deals during the coronavirus pandemic? Because they understand what changes need to be made to the underwriting assumptions.

When analyzing apartment deals, you input your income and expense assumptions. Then, you determine the purchase price that will result in ROI projections that meet your passive investors’ financial goals. If you use pre-coronavirus underwriting assumptions, you are virtually guaranteed to overpay and fail to meet your projections.

Therefore, if you want to do deals during the coronavirus pandemic that conserve and grow your passive investors’ capital, here are the four changes you need to make to your underwriting process.

 

1. Year 1 Operations

It could be expected that there will be an increase in vacancy, bad debt, and concessions throughout 2020. Once things settle down a bit and the economy reopens, it is possible that some residents will no longer be able to afford living at the apartment any more.

Therefore, year 1 projections should assume some softening of the rent roll. That is, higher vacancy, bad debt, and concessions than the T-12 and typical market rates.

 

2. Rent growth

The rent growth for 2020 in the vast majority of markets is projected to suffer as unemployment rises. However, most of any rent lost in 2020 is expected to be recovered in 2021. Therefore, rent growth in years 1 and 2 should reflect the immediate area and demand in the market. This information will come from your experienced property management company.

 

3. Debt

As of right now, most private lenders are taking a “pause” from bridge lending. However, lenders that are still active are being extremely conservative with their loan proceeds and terms. The agencies are lending, yet they are also being conservative on their underwriting and requiring large upfront reserves for debt service payments. Therefore, more conservative proceeds should be underwritten and the underwriting needs to include these upfront reserves as it will impact the equity required to fund. Make sure you ask your lender or mortgage broker about the new LTV, upfront reserve requirements, and other terms prior to submitting an offer on a new deal.

 

4. Value-Add Deals

Depending on the deal, we have seen many owners pause their interior renovation programs until the markets re-stabilize. When underwriting a deal, it may be wise to assume that the value-add program does not start until the overall market stabilizes.

 

Overall, it is a myth that you shouldn’t be doing deals during the coronavirus pandemic. But you will need to make the correct updates to your underwriting assumptions:

  1. Underwriting higher vacancy, bad debt, and concessions during year 1,
  2. Underwriting a lower rent growth during year 1
  3. Include any upfront reserves that are required by your lender
  4. Expect to delay your interior renovations if you are a value-add investor.

If you make these four underwriting changes, you can continue to do apartment deals during the coronavirus pandemic.

 

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
Lessons from Recessions

Lessons From Recessions: Advice From My 80 Million Dollar Mentor

Mentors are essential to your success. A mentor can come in many forms, in person, through books, videos, podcasts; the list goes on. I have mentors in various sectors of life including wealth, health, personal development and relationships.

Today I want to share with you some insights from one of my high-net-worth mentors who has been a full-time passive investor since the mid 1990’s after he sold his company for….mega millions. Over the past few years, he has taught me some incredible investing lessons and below are a few reflections from his investing experience during the Dotcom Crash in the early 2000’s and the Great Recession of 2008-2009. I hope you find these takeaways valuable. Enjoy!

Reflecting on both the 2000-3 and 2008-9 financial crises, here are the five lessons I learned:

  1. Reserve/preserve cash. Preserve for liquidity, reserve for opportunity. Develop a sense of where and when I should pounce on deeply discounted assets.
  2. Reconsider equities. The stock market has averaged a 10% return for the past 100+ years, but that has come with 20-70% volatility. When there are large dips, reconsider publicly traded equities.
  3. Rarely sell, but do monitor. In hindsight, I’ve seldom found selling to be the right move. By the time I decided to sell, it was too late (damage done). The hardest part has been convincing myself to get back in.
  4. Re-evaluate my liquidity needs. I’ve found the ill-liquidity premium to be a major driver toward superior returns. By giving up instant liquidity, I’ve often been able to move from 2% to 12%.
  5. Reset my asset allocation. I can’t live with “100 minus my age” — the percent of equities I should have in my portfolio, according to traditional asset allocation theory. I have stayed diversified and susceptible to far less volatility by moving from 60/40 to 5/5/5/5/10/20/30, using a blend of multiple asset classes.

Asset class analysis. After reading scores of 1Q20 commentaries and talking with multiple fund managers/GPs/RIAs, here’s my take on how the asset classes I’m invested in fared:

  • Cash. Based on the cash lesson above, cash is King and Queen right now. Money markets only paying <1%, but provide stability and optionality.
  • Bonds. Munis are marvelous because AAA paper now pays 80-100 bps higher yield than six weeks ago. My munis were down only 1.5% in 1Q. (Gov’ts are great for safety, but pay a paltry .6% yield — with rate rise risk. Quality Corporates are dangerous with 6-7% bid/ask spreads — HY spreads wider.)
  • Real estate. Has proven resilient so far. MF tenants are paying rents (at least they did in April), and asset values are holding (for now). Commercial a mixed bag: office above expectations, but malls getting crushed.
  • Public Equities. S&P off 17%, Dow down 20%. Significant recovery since March 23, but my sense is every rally has been a head fake.
  • Private Equity. No 1Q market to market reports yet, so values unknown. I’m not optimistic.
  • Venture Capital. Still waiting for my 1Q reports, but suspect valuations will plunge.
  • Alternative Income (Debt). Talking about RMBS, HY, RE lending, CLOs, etc. Margin calls, redemptions, and M-to-M pricing have pummeled these credits. Seeing drops of 5 to 50%.
  • Hedge Funds: L-S equity funds advertise the ability to profit in bear and bull markets, but when the market cracked, funds I’m in could not resist (1) covering shorts prematurely, and (2) buying more of their favorite, suddenly “really cheap” stocks. Hedge funds down 15 to 50+% in 1Q.

Conclusion from Travis:

I want to share with you a fundamental principle that has helped me tremendously over the past decade:

Pay close attention to the 1% of people who are actually DOING what you want to do and IGNORE the 99% who just like to give an opinion. Everybody has an opinion, but the only opinions that matter come from those who have actually accomplished what it is you set out to achieve.

Having these “1% mentors” in your own life can cut the learning curve by decades…

To Your Success

Travis Watts

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

Will Apartments Be Stronger in the Post-Coronavirus World?

JP Morgan Chase, the largest lender by assets and fourth largest lender overall in the US, recently announced that they are raising borrowing standards for most new home loans to reduce their exposure during the coronavirus pandemic.

JPMorgan Chase’s chief marketing officer for the home lending business said “due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers.”

What are these temporary changes? To qualify for a residential mortgage at Chase, a borrower must have a credit score of at least 700 and will be required to make a 20% down payment.

Additionally, Chase also announced that they are temporarily halting HELOC loan offerings.

JPMorgan is the first large lending institution to announce major changes to their lending criteria. I think a fair assumption is that other large lending institutions will follow suit in the coming weeks and months.

What does this mean for real estate investing and, more particular, apartments?

First, if less people qualify for residential financing, less people will be able to purchase their own homes. As a result, more people will be forced to rent. According to Experian, approximately 59% of Americans have a FICO Score of at least 700. And according to MBA, the average down payment across the housing market is around 10%. Therefore, the majority – and possibly the vast majority – of the population cannot qualify for Chase’s residential financing. Even if someone has a 700-credit score or higher, they may not be able to afford the 20% down payment due to the surge in home prices during the post-2009 economic expansion.

One benefit from buying a home during the post-2008 economic expansion was the increase in the value of the property from natural appreciation. According to Zillow, the average home value increased from $175,000 in March 2010 to $248,000 in March 2020. That is an overall increase of 47%, or 4.7% per year. This means that on average, the value of a home grew by nearly 5% each year. However, the Federal Reserve March consumer survey said home prices were expected to grow by only 1.32% this year, the lowest reading since the survey began in 2013. Therefore, one of the main financial benefits from owning a home has been eliminated, which may make renting more attractive.

16 million people are out of work due to the coronavirus. As a result, the number of borrowers who requested to delay mortgage payments rose by 1,900% in the second half of March. Currently, there has been a federal halt on foreclosures. So the question is, will foreclosures resume before or after these borrowers secure new employment? If it resumes before, many people will lose their homes and be forced to rent.

Overall, tighter lending criteria, the lowest projected home value increase since 2013, and the massive increase in the mortgage delay requests indicates that more people will be renting as opposed to buying in the near future. In fact, we are already seeing this happen. In March, the National Association of Realtors announced that they expect home sales to fall by around 10% compared to historical sales for this time of the year.

What do you think? Do you think more people will be renting or buying post-coronavirus?

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
The Mortgage Crisis - Will You Be Affected?

The Mortgage Crisis – Will You Be Affected?

Have you noticed the news headlines mentioning a “mortgage crisis” lately? This topic can be confusing so I wanted to help break it down and make it easier to understand. More importantly, I’d like to discuss how you and I are likely to be affected by all this. For reference, here are examples of a few recent headlines:

Mortgage Crisis Prompts U.S. to Weigh Harder Line With Borrowers – …Bloomberg

Another financial crisis is brewing in the mortgage market – …Curbed

Coronavirus mortgage bailout: ‘There is going to be complete chaos,’ says industry CEO – …CNBC

The first thing to understand is that this “mortgage crisis” is not what happened leading up to the 2008 housing crisis where banks and lenders were giving out loans to people who could not reasonably afford them. That ended in massive foreclosures and ultimately a nationwide housing crash. For this “crisis”, we have to examine the impact of the 2 trillion-dollar stimulus package that was recently passed. An important detail in the stimulus package is that the Federal Reserve is now buying mortgage-backed securities (MBS).

mortgagebacked security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments. The MBS is a type of asset-backed security.

 

So What Is The Crisis?

When a bank provides a mortgage to a borrower, the bank does not hold that mortgage debt on their books and collect a 3-4% coupon for the next 15-30 years. Instead, they often bundle these mortgages into an MBS and then sell that security to investors in order to get the mortgages off their books so they can make more loans to new borrowers.

The problem is, investors like you and I have slowed down on buying these MBS from the banks due to the current economic conditions (AKA there is fear and uncertainty in the market), so the banks were left holding these MBS on their books. This means the banks were running out of capital to lend out to new borrowers because they couldn’t offload these mortgage balances from their books. In order to keep the lending system moving, the banks decided to offer higher yields to investors to incentivize them to buy the MBS. While this is good news for MBS investors (they get a higher yield on their investment) and for the banks (they can offload these mortgages onto investors), it also means interest rates went up on new mortgages which is a bad thing for buyers and borrowers (they now can afford less and/or borrow less). In an attempt to “fix” this issue, the Federal Reserve jumped in and started buying these MBS securities to essentially back up the banks and keep the system moving.

 

Problem Solved – Right?

Not quite. When you or I apply to get a home loan, we lock in a rate on our mortgage ahead of time before we close. When we lock in a rate, the bank is essentially agreeing to give us that “locked-in” rate for our upcoming mortgage, but the bank doesn’t know what the actual interest rate is going to be at the time of closing. Because the bank doesn’t want to lose money on their bet in the event that interest rates change; the bank “hedges” or offsets their risk by betting against the investment.

Banks do this by shorting the MBS. But when the Federal Reserve steps in and starts buying the MBS, it drives interest rates down, causing the price of these MBS to go up. Since MBS trade similar to bonds, when interest rates go down, the price goes up and when interest rates go up, the price goes down. This causes banks to lose money on their short-hedged positions because they were betting that the price of these MBS would go down. To offset these losses, banks have to put up more capital and that means there is now less money to lend to new borrowers.

 

Hang In There…

There is one more layer of complexity to add to this situation. That is the “missed mortgage payments” you may have also seen in the news recently:

Mortgage Firms Brace for Wave of Missed Payments as Coronavirus Slams Homeowners – …Wall Street Journal

New York will let some residents skip 3 months of mortgage payments as coronavirus spreads – …Housing Wire

Homeowners hurt by COVID-19 can delay mortgage payments, but some say they’re anxious and confused about the real cost – …USA Today

Another section of the recent stimulus relief package includes potential mortgage payment forbearance of up to 180 days, with a possible extension of an additional 180 days. Here’s the kicker, even though people may not make their mortgage payment, the mortgage servicer (the one who handles and processes those payments) is still on the hook for making the payment. Mortgage servicers are obligated to keep the money flowing into the MBS, which are bought by investors like you and I who are looking for a safe and stable return on our money.

If a large number of people hold off on making their mortgage payments, then the question becomes…how badly will the mortgage servicers be hurt and how long can they stay afloat since they must continue making the payments even when the borrowers do not?

 

Practical Takeaways

· If you are in a position to invest right now, you might be able to buy certain assets at a lower price.

· If you are selling your home, it could be slightly more difficult to get a high price and/or to get a buyer who is qualified for a mortgage.

· If you are buying a home, the lending criteria might tighten up a bit

 

Bottom Line

This situation is likely going to affect banks and lenders in the short-term rather than having profound effects on you and I directly. I hope this blog provides some context and explanation for what’s going on, so the next time you read a headline about the mortgage crisis, you have some additional background and insight.

Please keep in mind, this is not financial advice and I am not an expert or an economist. This is only my interpretation and opinion of what is unfolding as of this writing. As always, I’m happy to be a resource for anyone looking to learn more. If interested, please select a time that works best for you.

https://calendly.com/traviswatts/consultation

To Your Success,

Travis Watts

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
How inflation can benefit you over the next decade

How Inflation Can Benefit You Over The Next Decade

With all the new money being pumped into circulation by the Federal Reserve, have you considered the impact this will have on inflation? The Fed just printed 2 trillion dollars in cash to distribute and by the time this is all over it could be closer to 4 or 5 trillion. For reference, the amount of money in the US money supply was under 4 trillion dollars as of November 2019, according to the Federal Reserve.

If we double the money supply, will there will be inflation?

Here’s the definition of inflation according to Investopedia:

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.

Here’s another way to look at it. If inflation increases in the near future, your salary will most likely go up, creating the illusion that people are making more money and everything is just fine. But consider this…what if your salary goes up but so does everything else? What if your grocery bill doubled? What if your monthly bills doubled? What if child care doubled? What if your health care and insurance premiums doubled? If the money in your bank account has half the buying power it had a year ago, would an increased salary make up for all that?

Bad News = The Fed is doubling our money supply

Good News = YOU can win in this new environment if you know how inflation works

Let’s consider inflation in terms of real estate investing. If the value of the dollar is declining due to inflation, then the debt you owe is losing value as well. Take a minute to let that sink in… Here’s a short story to put this into perspective. I recently looked up the historical sale prices for a house that my wife and I bought and sold a few years ago. The house was a Tudor home built in 1932. This is an example of inflation in practical terms:

  • In 1932, the original sale price was $5,000
  • In 2010 the home sold for $235,000
  • In 2015 we bought the home for $480,000
  • In 2017 we sold the home for $600,000
  • In 2020 the comps are around $700,000

So, here is the lesson. If you acquire long-term fixed rate debt (a mortgage) then inflation is GOOD thing for you. Today, what is available to you and I today is the ability to obtain debt at historically low interest rates and pay them off with cheaper dollars as inflation rises and the dollar declines in value.

A Few Practical Takeaways:

#1 Consider refinancing your home so you have cash during this market correction. Forget about the 3% interest rate you would pay, because inflation will be more than that.

#2 Consider investing in real estate assets that have a conservative amount of debt or “leverage”. This could mean a home, but this could also mean investing in multifamily apartment syndications as my wife and I do.

#3 This could be an amazing opportunity to get started in real estate if you haven’t already!

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
How Today's Market compares to that of 2008's great recession

How Today’s Market Compares to that of 2008’s Great Recession

It’s natural to want to compare what’s going on in today’s economic climate to what happened during the fourth quarter of 2008. During our Cincinnati Best Ever REI Mastermind webinar, Peter Chabris, owner of The Chabris Group, joined us to give us his thoughts on this subject and he admitted that it’s scary.

“It was horrible. There was fear, for sure, just as there’s fear now,” said Peter. “I think the big difference is that in real estate, there were a lot of people who felt like it wasn’t going to impact real estate as much as it did.”

Since this is happening in real time, it’s difficult to make comparisons but Peter points to two very distinct differences between 2008 and today. Peter points out that since the recession, the country has had a completely different emotional mindset when it comes to real estate. The years leading up to the crash were filled with greed, from the loan originators all the way down to the consumer and there was denial in 2008. Furthermore, this time it’s different because inflation, interest rates, GDP expansion and other economic fundamentals had been strong up until the pandemic hit.

What Peter is paying closest attention to right now are lead indicators.  Lead indicators are when someone expresses interest in real estate, gets qualified, and then chooses to enter the market at the moment. Lately, his lead indicators have pointed to a pretty steep drop off of activity.

“Our team’s conversion rate is about 4%, meaning, on average, for every 20 – 25 people we talk to, one will agree to work with us to purchase, sell, or invest in real estate. In the last three weeks that has dropped down to 1.2%. So, that’s a lead indicator of future demand.”

Peter also believes there is indication that buyer activity is waning and within 2-3 weeks, we’ll see a corresponding shift in prices throughout the market.

Check out this clip of Peter’s interview with our REI Mastermind host Slocomb Reed.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

Everything You Need to Know About the Coronavirus SBA Disaster Loans for Investors

The US Small Business Administration is offering low-interest disaster loans that can be used as working capital for small businesses who’ve been financially impacted from the Coronavirus.

The following is taken directly from the sba.gov website about the disaster assistance in response to the coronavirus.

  • Any such Economic Injury Disaster Loan assistance declaration issued by the SBA makes loans available statewide to small businesses and private, nonprofit organizations to help alleviate economic injury caused by the Coronavirus (COVID-19). This will apply to current and future disaster assistance declarations related to Coronavirus.
  • The SBA’s Office of Disaster Assistance will coordinate with the state’s or territory’s Governor to submit the request for Economic Injury Disaster Loan assistance.
  • Once a declaration is made, the information on the application process for Economic Injury Disaster Loan assistance will be made available to affected small businesses within the state.
  • The SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance and can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
  • These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
  • The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
  • The SBA’s Economic Injury Disaster Loans are just one piece of the expanded focus of the federal government’s coordinated response, and the SBA is strongly committed to providing the most effective and customer-focused response possible.
  • For questions, please contact the SBA disaster assistance customer service center at 1-800-659-2955 (TTY: 1-800-877-8339) or e-mail  disastercustomerservice@sba.gov.

I took a look at the application and here is who does and doesn’t qualify.

You qualify for the program if one of the following applies to you and your business:

You do not qualify for the program if one or more of the following apply to you and your business:

Click here to apply today!

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

How to Get Up to $100,000 From the Coronavirus Stimulus Bill

Most people are focusing on the direct cash payments from the $2 trillion coronavirus stimulus bill. However, it also includes provisions to have individuals can used their retirement accounts, such as a 401(k) or IRA.

In the past, if you wanted to withdrawal money from your 401(k) or IRA, you would be required to pay an early withdrawal fee of 10% and income tax on the distribution. Now, you are allowed to take a coronavirus-related hardship distribution of up to $100,000.

Individuals who qualify are people who are diagnosed with coronavirus, spouses or dependents who have coronavirus, or those experiencing financial consequences from quarantine, furlough, layoffs, or having their houses cut due to coronavirus. But the rules are loose and retirement plan sponsors are told to rely on employees’ word that they’ve eligible.

Therefore, this provision may be able to help your residents pay rent, help you or someone you know cover living expenses, or help you cover business expenses.

The up to $100,000 distribution is also tax free for 3 years, at which point the money must be replenished or an income tax will be incurred.

If you haven’t experienced a coronavirus-related hardship, you can still access up to $100,000 from your 401(k). In the past, the maximum loan amount you could take against your 401(k) was $50,000 or 50% of the vested amount, whichever is higher. With the coronavirus stimulus bill, the maximum amount has doubled to $100,000. The loan process is the same, which means you need to pay back the loan with interest or else it will be treated as a withdrawals which is subject to a fee and income taxes.

This loan can be used to cover rent, living expenses, or business expenses. Also, many investors use 401(k) loans to acquired investment property.

 

If you have a 401(k), IRA, or other retirement account and experienced a coronavirus-related hardship, you may be able to access up to $100,000 without paying an early withdrawal fee or paying taxes for up to three years. If you haven’t experienced a coronavirus-related hardship, you can still access up to $100,000 by taking a loan out against your 401(k) balance.

Click here to access our other coronavirus-related content.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
How the Fed Can Prevent a Mortgage Crisis

How the Federal Reserve Can Help Prevent a Mortgage Crisis

According to CNN Business, unless the Federal Reserve provides more emergency lending, a surge in missed mortgage payments could crash the real estate market. This is because, even though homeowners are being provided forbearance on their mortgage from the Coronavirus Relief Bill, the mortgage servicers are still required to pay principal and interest on the mortgages to investors. It’s likely that, as of right now, mortgage servicers don’t have enough cash to cover all of the missed payments. There’s a real threat of these defaults creating a housing crisis.

 

So, what’s next for mortgage servicers? This article explains how the Fed will invoke emergency powers to prevent a credit crisis.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

11 Tips for Collecting Rent During the Coronavirus Pandemic

he first of the month is right around the corner. In the previous months, rental property and apartment owners knew that the vast majority of their residents will submit their rent in full and on-time. It was something that they really didn’t even think about. However, this first of the month will be different. It will be the first time rent is due during the coronavirus pandemic.

Between now and when rent was last due, many people have lost their only source of income. They’ve been furloughed indefinitely or laid off.

The US Senate passed a $2 trillion stimulus bill March 25th which will be voted on by the House this March 27th. According to MSN news, “the bill would extend $1,200 to most American adults and $400 for most children, create a $500 billion lending program for businesses, cities and states, and establish a $367 billion employee retention fund for small businesses. It would direct $130 billion to hospitals and provide four months of expanded unemployment insurance, amount other things.”

This is good news for real estate investors, as they may be able to take advantage of the $500 billion lending program and their residents can cover a few months rent with the direct cash payment. However, even if the bill passes through the House on Friday, neither you nor your residents will receive the benefits before rent is due on April 1st. So, what do you do?

I’ve scoured the Internet to see what other real estate investors are doing to collect rent this month and here are the top 11 tips I came across:

 

The first pieces of advice came from our Best Ever Show Community on Facebook.

Justin Wright’s plan is simple: offer a small discount to residents who pay their full rent early or on-time. For those who cannot pay their full rent on-time, he will offer a re-payment plan to allow residents to make up for unpaid rent later (more information on a potential rental repayment plan later on in this post).

Julie Fagan came up with a very unique approach to collect rent on the first of the month. First, she will allow her residents to apply their security deposit towards a reduced monthly rent payment. For example, if a resident has a $1,000 per month rent payment and a $1,000 security deposit, their monthly rent is discounted to $500 so that they can cover two month’s rent with their security deposit. In return, the resident must sign a new 12 month lease and sign-up for security deposit insurance. The residents pay $10 per month per $1,000 in security deposit insurance, which covers damages and unpaid rent.

The next two ideas came from a Best Real Estate Investing Advice Ever Show podcast interview Theo did with Daniel Purcell (which will air in early April). The first tip is to communicate with all of your residents to understand their ability to pay rent in full and on-time. You definitely don’t want to skip this step. Not every single resident will have an issue paying their rent. All of Daniel’s long-term rental residents will be able to pay rent on-time (it is a different story for his short-term rental portfolio). Click here to learn how we are communicating with our residents as a result of the coronavirus pandemic. You need to understand who will struggle to pay rent to determine if you need to take any extra measures to maximize your rent collections.

Daniel’s other strategy was very interesting. Half of his portfolio consists of long-term rentals, which – as I mentioned – he doesn’t expect to be impacted by the coronavirus. The other half of this portfolio are Airbnb rentals, which are obviously impacted immensely by the coronavirus. While he is attempting to pivot his strategy on those properties to traveling nurses, he doesn’t expect to find renters for all of this units. Therefore, rather than have the units sit vacant, he plans on volunteering his units to professionals who are traveling to help with the coronavirus, like Red Cross workers. He said “the worst case scenario is that you help someone else.”

Brandon Turner of BiggerPockets created a YouTube video with his strategies for collecting rent during the coronavirus pandemic. His five step plan included three great strategies. First was to keep an eye out for federal and local programs that will be created to help residents pay their rent (like the $2 trillion stimulus bill discussed earlier). Second was to have residents pay their rent with a credit card. Third, which is the last option he offers, is to offer an emergency rent deferral program. His program allows residents to defer paying rent for up to two months, at which point a 10 month repayment program will commence. For example, if a resident misses a $1,000 rent payment in April and May, they will owe the regular $1,000 rent payment in June and will owe $1,000 plus $200 per month for 10 months.

A few others ideas I came across are to provide a month of free rent to residents who can provide you with a financial hardship letter from their employer, stating that they have been laid off or furloughed due to the coronavirus. The other was to reduce rents to the point where you don’t make any money but are still able to cover all your expenses.

 

The 11 tips are to:

  1. Offer discounted rent to those who pay rent on-time or early
  2. Offer a repayment plan
  3. Allow residents to apply security deposit to rent
  4. Ask residents to pay for security deposit insurance
  5. Communicate with residents to see who can and cannot pay rent
  6. Volunteer your units for free to coronavirus volunteers
  7. Use federal or local programs created for landlords and renters
  8. Ask residents to pay rent with a credit card
  9. Offer an emergency repayment program
  10. Provide free rent to residents who lost their job
  11. Reduce rents to breakeven

 

What other strategies do you plan on implementing to collect rent?

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

The Families First Coronavirus Response Act

Whether you’re a small business owner, a W2 employee, or a self-employed freelancer, it’s important to understand the benefits available in the event that you, one of your family members, or one of your employees contracts COVID-19. The Families First Coronavirus Response Act was signed into law on March 18, 2020, and addresses the paid sick leave, insurance coverage of coronavirus testing, nutrition assistance, and unemployment benefits. This Act is the second major legislative initiative to address COVID-19, after the first was signed on March 6 to provide emergency funding relief for domestic and global efforts. The main impacts on small businesses and employees include the following.

 

  • Under the Families First Coronavirus Response Act employees of businesses with fewer than 500 employees, will be given paid sick leave for two to 12 weeks. Employers will be fully reimbursed by the federal government within three months via 100% tax credits.

 

  • Single household workers are eligible for 80 hours of sick leave with full pay, capped at $511 per day, or a collective $5,110 per worker, if they are unable to come into work or work remotely due to self-quarantine, Covid-19 medical treatment, are at risk for shedding viral debris, or are mandated to remain quarantined by the government. Part-time workers will receive a proportionate share of the benefits above.

 

  • If you are currently staying home to care for someone who has been infected by the coronavirus or is suspected of having it, or for a child whose school or daycare is closed, the two weeks of sick pay will be two-thirds of compensation and capped at $200 a day or an aggregate $2,000 per worker.

 

  • Sick-leave and family-leave payments mandated by the Act are exempt from the 6.2% Social Security tax component of the employer’s federal payroll tax that normally applies to wages. Employers must pay the 1.45% Medicare tax component of the federal payroll tax, but they can claim a credit for that outlay.

 

To get a better idea of how the Families First Coronavirus Response Act will impact small businesses owners and self-employed people, read this article by MarketWatch.

 

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
Solutions for Homeowners who need quick cash

Solutions for Homeowners Who Need Quick Cash

Many Americans may find themselves struggling to stay afloat during this Coronavirus pandemic. We’ve been warned that unemployment could skyrocket from 3.5% to 20% this year due to the economic impact of the virus. Hopefully, the Families First Coronavirus Response Act and the Coronavirus Relief Bill will provide enough assistance to get you through these difficult times, but, if not, you can find additional cash reserves through your home if you own.

This article on Forbes.com will tell you about some options you have to allow your home to help pay the bills. These options include:

  • Home Equity Loans and HELOCs
  • Refinancing
  • Equity and Appreciation Sharing
  • Leaseback

It’s also important to remember that foreclosures have been halted for at least 60 days on Fannie Mae-, Freddie Mac- and FHA-backed loans.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin
Coronavirus Relief Bill

An Update on the Coronavirus Relief Bill

With the $2 trillion Coronavirus Relief Bill unanimously approved by the Senate Wednesday night, we now wait for the House to take up the Bill and send it to President Trump to be signed into action. The expectation is that this will occur by Friday. As the largest fiscal stimulus package in modern American history, here’s a quick rundown of what you can anticipate coming from the Bill:

 

  • Single-households that earn $75,000 or less a year (as per their latest tax return) will be supplied with a one-time payment of $1,200. Couples who earn $150,000 annually will receive a one-time payment of $2,400 with an additional $500 per child within that household. These benefits are capped around the $99,000 income level and tapper between $75,000 and $100,000.
  • State benefits will increase to $600 per week during that same four-month window, and regular state unemployment aid will be extended for an additional 13 weeks. Unemployment benefits will also be expanded to include gig workers, self-employed contractors, and freelancers. These members of the workforce will have an approximation of their salaries remunerated on a state by state basis for the ensuing four months.
  • $500 billion of corporate aid will be supervised by an inspector general alongside a congregational board to properly administer provisions and prevent instances of fraud.
  • At least $350 billion will be supplied to small businesses to put toward payroll, and employers will be able to defer payment of the 6.2% Social Security payroll tax. Lost salaries will additionally be backed up by federal installments that operate like grants to allow business owners to keep their employees staffed during the economic downturn.
  • Companies will be given a $50 billion tax credit to facilitate employee retention.
  • Industries that have been critically impacted, namely airlines and cargo carriers will receive $25 billion and $4 billion in direct financial assistance respectively.

 

Whether you’re a landlord or an apartment investor, this is potentially good news, at least temporarily. The added unemployment benefits should keep your renters afloat for the next four months. We’re keeping a close eye on this Bill to see what, if any, changes happen between now and when it passes. Check back often to see how this unfolds and get expert advice from a multitude of sources.

You can read more about the Coronavirus Relief Bill here:

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin