Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
A lot of you out there want to get involved with real estate investing or ramp up your existing portfolio. But how can you manage it in this “corona crazy” environment, where it’s hard to get a loan and tenants might not be able to pay you? In this article and video, I’m going to show you a path to investing or expanding your existing portfolio given the current circumstances.
Before I get into how you do it, let me outline some of the challenges that are present today.
Facing Present Challenges as a Real Estate Investor
Tenants are struggling right now. As of February 2020, the unemployment rate in this country was only 3.5%. As of May 8, 2020, unemployment has skyrocketed to 14.7%. And unfortunately, the rate is continuing to trend higher.
While I don’t dare to make a prediction of where the numbers will top out, I can say that the tenants that reside with us are dealing with uncertainty in terms of how to pay their bills from one month to the next. Yes, the stimulus money and increase in unemployment benefits were a welcome relief to many. But these benefits are temporary and set to expire later this year—which then spills over to the loan side of the equation for landlords, since the banks don’t trust the monthly income that’s coming in.
Challenge No. 3: No New Tenants
It is difficult to find new tenants at the moment. COVID-19 couldn’t have come at a worse time for multifamily operators. The strongest rental season has historically always been the spring, and most operators gear up renovations and CapEx expenditures to coincide with peak rental season.
That has been flipped on its head.
The silver lining is that most people are not moving out, which is keeping the current occupancy levels close to where they were pre-COVID. There is a definite lack of new tenants for available vacancies, though.
Finding good deals is also tricky right now. Potential sellers still have recent highs in their memory, while potential buyers want to be compensated for the risks of the current environment. In other words, buyers and sellers don’t view the market the same way at the moment. This has created a noticeable void in “good” deals.
With the challenges summarized, let’s get back to the original question: How can you start investing now?
Starting Out as an Investor Despite Economic Volatility
Start With the Roof Over Your Head
The first thing new investors should do is a house hack. This was an important strategy pre-COVID and has become even more critical today.
Why? Because “the best offense is a good defense.”
In its simplest terms, you house hack by renting out a portion of your primary residence. This can be done by renting out a room or an additional apartment if your house is a duplex, triplex, or quadplex. The end result is a significant decrease in living expenses for you, which in turn should allow you to buy more real estate.
A great resource for house hacking is the book The House Hacking Strategy. Author and former BiggerPockets employee Craig Curelop literally wrote the book on this subject—it’s a must-read.
House hacking also overcomes the first challenge that I mentioned earlier: financing.
The banks that are lending for primary residences do not have the same limitations as the banks who are lending on investment properties. The main criterion for the loan is the borrower’s ability to pay it back, and as long they are still working, they can qualify. The cherry on top is that rates are at historic lows, and there are low-money-down options.
This strategy can be repeated over and over again (after a certain time limit if it’s an FHA loan). When you move, you’re left with a rental that has extremely favorable financing attached to it.
Even if the idea of house hacking is not for you, you should consider refinancing your primary residence if your rate is higher than today’s drastically low rate.
The second way to get started investing now is to work with others. Find someone who is in your desired market and work with them on deals they already have. After all, real estate is a team sport.
Some things you can offer to help with include keeping an eye on the property manager, offering to walk the site for them, or meeting with contractors and inspecting their work prior to the release of funds. Notice none of these actions require money—instead they require time and create value for the operator.
The next best thing you can do is listen to your operator. If you begin working with someone, there will be hints on other ways to provide value—you just need to listen. Providing constant value is the best way to join someone’s team. And let’s say nothing materializes, you will have gained knowledge as a consolation prize.
Alternatively, you can start your own team. But this isn’t recommended when first starting out. Instead, focus on someone who is a few steps ahead of you and help them get where they want to be.
The last way to get started in real estate in the current lending environment is by working with private capital. In my book Raising Private Capital, I talk about raising funds from your own network. With financing being today’s primary challenge, there is a lot of power to the person who can obtain the capital needed to close on a deal.
The two main forms of capital are debt and equity. By presenting the deal to your investors the right way, you can take the bank out of the equation. Once the banks come back into the picture, you can readjust your strategy accordingly. But the emphasis here is that if you want to do a deal now, you may have to do it without the help of the bank and with the use of your private network.
Seller financing would also fall under this category, since the seller becomes a debt investor in your deal once the transaction closes.
The COVID environment will eventually pass, and real estate investing will return back to normal. What the new normal will be is anybody’s guess. That’s why it’s important to persevere and continuously take action in progressing your real estate goals.