Coronavirus Updates

Is It Safe to Invest in Real Estate Right Now? 7 Ways to Mitigate Your Risk

Expertise: Mortgages & Creative Financing, Real Estate Investing Basics
35 Articles Written

I began 2020 with the goal of increasing my portfolio holdings by over 30% and gaining hundreds of dollars of additional passive monthly cash flow. We are now nearly six months into the year and entering month three of the pandemic. Like many of you, I’m wondering if my annual goal is even relevant right now. Moreso, I’m wondering if it is even safe—or responsible—to invest?

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I sat with this question for a few days back in late March. I didn’t really have much else to do, since my daughter’s spring break was canceled, and I hadn’t realized I’d need to learn to cut hair yet.

I went back to basics and combed through my financial foundation plan for “cracks.” I even went through my financial growth plan to plug my money “leaks” that had crept in over time. My answer to this question (one that I know many of you are wrestling with) was that now can be a great time to invest in real estate—if you are doing so smartly and from a position of strength.

Let me help you bust the myth that now is a horrible time to buy and help you get the right mindset and plan in place to move forward and scale safely.

Your 7-Point Checklist for Investing

What you want to do is stack as many investing cards in your favor as possible. Get back to fundamentals, if you will.

First and foremost, ensure you are abiding by the four tenets of conservative investing (capital preservation, cash flow, appreciation, and tax benefits), as well as identifying solid growth markets that yield cash flow and are poised for modest appreciation.

However, as you move through the following months, there are a few additional considerations to include in your underwriting and due diligence process.

1. Lower ARV—Especially in a BRRRR Project

Go into this year calculating a 10-15% discount in ARV projections during the refinance phase of the project. That doesn’t mean that prices will drop (they may even go up!). However, if you have stress-tested your financial model, acknowledge that the market could soften by the time you are ready to refinance your project, and leave a little capital in to complete the deal, you will have far fewer surprises.

2. Higher Vacancy During Your First Year

The current vacancy data from any property manager is from a pre-COVID environment. If you go into the first year underwriting 25-30% higher vacancy rates, screen your tenants for income and employment, and carry adequate reserves to weather this storm, you will be well-positioned to carry your investment through this tumultuous time.

woman packing and sealing a moving box with tape

Related: How to Reduce Vacancy During an Economic Downturn

3. Lower Market Rents

If you are putting a unit into service (say, with a BRRRR), you want to ensure you have room within your rents to remain competitive in the market. This isn’t the time to do an infinite return deal with only $10 cash flow (on a good day). Stress-test your rent underwriting to be 10-15% under the market rents.

This doesn’t mean rents will soften this much, but you will be able to sleep far better at night if you know that your business plan still works even if you have to bring down rents for a few months. You can also consider doing shorter leases with the lower rents and re-evaluate the market in six to nine months.

4. Lower Rent Growth

Vacancy is your No. 1 income killer. If you have an occupied unit, ask yourself if it makes sense for you to risk a turnover for a 2-3% rent increase.

For me, I have seven units turning this summer, all with great long-term tenants. It didn't make sense for me to risk a turn for $30/month by the time I factor in turn costs, lease-up fees, and the unknown financial situation of the next tenant. Therefore, we renewed three of the seven at their current rents (four others are pending for late summer) and will continue to evaluate this plan throughout the summer months.

5. Construction Budget

As we move through this market, think about keeping expenses low and more cash in your pocket. Cash on hand is vital for your business.

Can you pick up a property and hold off on the rehab for a year or two until everything stabilizes? Or can you do a smaller rehab to preserve cash and tackle larger items later?

man on ladder installing air conditioning unit in ceiling opening

For example, I have a unit that I planned to replace the HVAC in this summer, but it has two or three years of life left. Additionally, the new HVAC unit does not achieve a rent premium for me. Meanwhile, I have a second unit that needs carpet during a possible turn. Weighing the two CapEx items, I will complete the carpet replacement to capture my rent premium and delay the HVAC for a few months as I watch the rental market.

If you do decide to rehab, have a large contingency reserve to handle any cost overruns.

Related: The Simple 6-Step Process for Estimating Rehab Costs

6. Expectations on Lending

If you need commercial lending to complete a BRRRR deal, it's well known that most commercial lenders aren't doling out loans currently. Those that are, are doing so cautiously with a much lower LTV and are lending to borrowers with up to 12 months of reserves and a proven track record.

Qualifying is not very feasible for a new BRRRR investor who is on their first deal and can’t even do a conventional refinance.

As a result, you may find yourself in a situation where you need to partner with someone more experienced to get access to commercial financing. If you have a rock-solid deal, there are plenty of investors who would partner up (50% of a deal is better than 0% of no deal).

7. Multiple Exits

Just like in a pre-COVID environment, think about purchasing deals where you have multiple exits. For example, could you do a traditional flip, flip to an investor, BRRRR, buy and hold, wholesale, JV partnership, corporate rental, etc.?

Underwriting your deal for multiple exit possibilities will give you ultimate flexibility as you move through the next year.

Pulling It All Together

person on laptop searching real estate listings

It’s a myth—don’t believe that you can’t invest in this market (especially BRRRR investing).

Will it be easy? Probably not. But it is definitely doable.

To wrap up, here are the seven ways to stress-test underwriting expectations:

  1. Lower your ARV.
  2. Lower your market rents for one to two years.
  3. Lower your rent growth for one to two years.
  4. Increase your economic vacancy for year one.
  5. Increase your contingency for construction, or possibly postpone the scope of work.
  6. Increase the need for lending reserves, or possibly bring on a partner.
  7. Explore multiple exit strategies to mitigate your risk.

As for my 2020 goals, will I hit them? Maybe. I’m not so naive to think that I won’t have to adjust them.

But am I continuing to make steady and calculated progress toward them? Absolutely!

Arming myself with a plan to mitigate my investing risk during this time of uncertainty is key to my confidence to continue to invest and build toward my dreams. What’s your plan?

What adjustments are you making to mitigate risk right now?

Share your thoughts in the comments below.

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Cesar Arciniega New to Real Estate from San Diego, CA
    Replied about 1 month ago
    As an individual in the learning and planning phase, I found this post to be extremely inspiring. Thanks.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 1 month ago
    Glad you like it, Cesar.
    Ricardo A Perez from Hollywood Florida
    Replied about 1 month ago
    i second @cesar arciniega's post thank for this informative post.
    Ed Briley
    Replied about 1 month ago
    Some good news. If you wonder if it is a good time to invest in Real-Estate, it is. The reason is because anyone that has concerns to do so, there is another million people that will not do so. Real-Estate is never a bad investment, rather you make money on it or not. It is much more secure than buying a new car, that is for sure.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 1 month ago
    I tend to agree, Ed, if purchased correctly. You can still screw up real estate ;)
    Matt Everling Rental Property Investor from Temecula, CA
    Replied about 1 month ago
    Great article. Nice to read on the possibilities that exist if you plan correctly in this upside down world. I needed that. Thank you.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 1 month ago
    Glad you found value, Matt.
    Jose M Romera from Atlanta, GA
    Replied about 1 month ago
    Great advice!
    Michelle Y. Rental Property Investor from Arizona
    Replied about 1 month ago
    Great article and advice!
    Kevin Holmes Investor from Jamaica, NY
    Replied about 1 month ago
    Right on point. I refinance 2 months ago four of my properties and cashed out with a interest rate at 4.5. I was think just like you said about having more cash on hand.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied about 1 month ago
    I bet you feel like you are in a good position now, Kevin!
    Stephen Bianes Rental Property Investor from Austin, TX
    Replied about 1 month ago
    Thank you for sharing this gem!
    Jim Glover Investor from Auburn, GA
    Replied about 1 month ago
    Great article - appreciate your thoughts. I took a big swing into real estate in 2012 buying 10 houses in just over a year, then I got busy and let the increase in prices stop me from buying more. Those house are great now both in rent and appreciation, but I am very frustrated with myself that I haven't been active in so many years. So like you this year I set the goal to buy at least 3-5 more houses, even though in the back of my mind I still kept thinking I should just hold my cash and buy big again if things slowed down. Well then we get the CV19 event and I am not sure what to do? I have one house I hope to close on quickly in the next few weeks, and after that I am pretty well positioned to pay cash for more. I don't want to cheer for prices to fall and hurt others, but if they do I will be buying fast. Time will tell!