It’s hard to wrap my mind around how fast the COVID-19 pandemic has changed our world.
A month ago I was vacationing normally and enjoying meals out with my wife, albeit with one eye on the news about the spreading virus. I thought masks in supermarkets were a bit alarmist and silly.
Now we’re all sheltering in place, social distancing, wearing masks in public, minimizing our contact with the outside world. Most businesses shuttered. Most homeowner foreclosures suspended, and most evictions either expressly or indirectly suspended due to decrees or civil court closures.
Oh, and there’s the roughly $4.3 trillion in combined federal stimulus measures announced in the US alone ($2 trillion passed by Congress, and another $2.3 trillion in lending announced by the Federal Reserve). I’m already bracing for the eventual and inevitable inflation that will hit after the economy recovers. Although admittedly, that might take a while.
So, here’s how I’m preparing financially.
How COVID-19 Has Changed the Way I’m Planning to Invest
1. I’m No Longer Open to Selling Real Estate
I had a nightmare tenant that cost me a shocking amount of money and took six months to remove. The property sits in an extremely tenant-friendly jurisdiction, where I no longer invest for that very reason. In fact, this represents the last property I own in my home town. I planned to sell it and wash my hands of the whole city once and for all.
The buyer base has fallen out of the real estate market. Early data from the National Association of Realtors showed that nearly 48 percent of Realtors reported their buyers withdrawing, while only 16 percent of sellers had done so. And that was back in mid-March—while only a few weeks ago, it feels like a lifetime in the midst of this crisis.
In other words, the balance of supply and demand has tilted suddenly and dramatically in favor of buyers. I expect a buyer’s market for the immediate future until the economic recovery takes root.
So I’m stuck with this property. Fortunately, the property cash flows well. Now I just need to fill it with a reliable renter with a stable job, a task far easier said than done at the moment.
2. I’m Not Considering Flipping Houses
For the exact same reason, I brushed flipping houses off the table for the moment.
Not that I’m much of a flipper anyway. But my business partner and I had been exploring joint ventures, and possibly even opening it up to our students and audience to participate in as junior partners.
That plan can wait.
3. I Won’t Sell Any Stocks for Capital
My partner and I had some fun plans for joint ventures in rental properties too, again hoping to open them up to our audience to join us. I had some cash set aside for it, and some stocks I was willing to sell for additional capital if need be.
Now those stocks are worth a fraction of their previous value. They’ll recover of course, but it could take a while. And while I don’t mind selling stocks in a bull market to reinvest in real estate, it’s hard to get excited about taking a 20 percent loss on one investment in order to invest it in another for 8-12 percent per annum.
Like most investors, I suddenly find myself with fewer resources at my disposal.
4. I’m More Reluctant (and Less Able) to Take on Debt & Financing
Even as I find myself with less capital to invest with, I also see far more danger in debt than usual.
And less ability to wield it, for that matter. The pundits haven’t talked much about it yet, but we’re entering a credit crunch. Lenders are pulling back, both as their borrowers start defaulting en masse and as their own ability to raise capital evaporates.
Remember, mortgage lenders don’t just have warehouses of gold coins sitting around like Scrooge McDuck. They make loans, and then they sell them to institutional and wealthy investors on the open market, often through mortgage-backed securities. Even portfolio lenders typically raise their capital through crowdfunding or institutional investors.
All of whom have largely stopped investing. The financial world is largely holding its breath to see how this crisis unfolds.
Many portfolio lenders have suspended new loans entirely. Other lenders cautiously continue lending, with dramatically tighter loan standards. But any way you slice it, it’s harder to get financing right now.
Besides, with a deep global recession looming, we all know it will be harder to collect rents on time in the months (hopefully not years) to come. With higher risk of rent defaults, more debt means more danger than usual.
5. I’m Pausing New Rental Investments Until Courts Reopen
Landlords have exactly one legal recourse to enforce the terms of their lease contracts: the eviction process.
And that process has been temporarily suspended. Landlords literally cannot enforce their lease contracts.
A shocking one-third of American renters defaulted on their rents in April 2020. A third! And what can landlords do about it? They can default on their mortgages, and almost nothing else.
A dangerous game of financial dominoes. Perpetually-angry housing activists might be frothing at the mouth to foment rent strikes, but they clearly slept through Macroeconomics 101 in college. Tenants don’t pay their rent, landlords don’t pay their mortgages, banks start collapsing, and suddenly we no longer have a global financial system. Or retirement accounts. Or paper assets of any kind.
But I digress. The bottom line: it doesn’t make sense to buy an investment that can’t reliably generate revenue. And make no mistake, rental revenue will be as unreliable over the next few months as it’s ever been.
6. I Plan to Score Some Outstanding Deals
When the immediate public health crisis passes, the courts reopen, and jurisdictions lift their eviction moratoriums, property owners will at least be able to enforce their leases again.
With soaring unemployment, landlords will still face a higher risk of rent defaults. But with thorough tenant screening, economically-healthy neighborhood choices, and rent default insurance, landlords can avoid most rent defaults.
I will resume investing, and with a vengeance. Investors will find plenty of opportunities for deals, among sellers willing to accept a low offer in exchange for a fast, guaranteed sale.
I’m not going to accept the kind of deals we’ve seen over the last few years. I plan on some 2010-level discounts.
A Few Things that Haven’t Changed
Despite the sudden shift in the economy, my core investing principles remain as firm as ever.
I believe in both stocks and real estate as the foundation of my portfolio. I dabble in a few other investments here and there, but I invest in real estate for immediate income, tax advantages, and inflation protection. I invest in stocks for long-term growth, diversification, and liquidity. That hasn’t changed.
My stock investments are 100 percent automated through a robo-advisor (I personally use Schwab Intelligent Portfolios, which is free with at least $5,000 invested). I employ dollar-cost averaging: every two weeks, the exact same amount transfers automatically into my robo-advisor account for investing in the same asset allocation.
And despite the typical snide commentary by pundits who love to hate on FIRE (financial independence, retire early), I think crises like this illustrate precisely why more people should be following FIRE advice like saving more money and living on less. Has my portfolio taken a hit during the COVID-19 crisis? Of course. Do I regret my high savings rate and investments just because we’re in a bear market? Of course not.
Quite the opposite, in fact. The more income-producing assets you have, the better positioned you are to weather economic storms.
I have no intention of “retiring” in the traditional sense, ever. I have every intention to reach financial independence within the next few years.
The world hasn’t seen an economic crisis like this since the 1930s or a public health crisis like this since 1918.
For investors, that means far greater risks. But it also means far greater opportunities.
How often have you heard real estate investors say, “I wish I’d bought more properties in the early 2010s when prices were so cheap”? I hear it nearly daily.
Tighten your belt, boost your savings rate, and set aside as much cash as you can. In the months to come, you’ll find deals on both real estate and stocks that you’ll be reminiscing about fondly in a decade from now.
How has the coronavirus pandemic changed your investing plans? How do you plan to come out ahead rather than behind, in the aftermath of this crisis?