COVID Caused a Massive Housing Shortage—Here's How to Profit From It

COVID-19 has changed every industry in the country in some way—oftentimes, in ways we didn’t expect. The media and social networks publicized many of the impacts of the virus, but some may have flown under the radar. Here’s what I mean: a major unexpected impact of COVID on real estate is a severe housing shortage.

As an owner of a property management company, I worried that nobody would want to move during the coronavirus pandemic. We expected higher time to fill units, and we expected units to sit vacant for a while. It turns out that the exact opposite happened—units are renting faster than ever in the 8-year history of our management company.

So, what is going on in the housing market, and how can real estate investors profit from it?

Historically Low Housing Supply

Let’s start with understanding the supply side of housing. There are four major things causing the supply of housing to shrink rapidly.

New construction down

The construction of new units has been either halted or extremely scaled back over the last 6 months. New construction of rentals adds a significant amount of volume each year, hovering around 300K units. But we are seeing delays in getting permits due to COVID, as townships aren’t having regular meetings. We are also seeing delays in financing, which also causes projects to slow down.

Finally, in many areas, there are still restrictions on the number of workers that can be in one place at the same time. The bottom line here is that new units are not being built at the same rate as normal, and we expect this delay to continue for at least another couple of months.

Rehabs slowed

Many rehabs were either halted or slowed down the last 6 months, as well. Similar to new construction slow-downs, rehab crews were not moving at their normal pace due to the many restrictions put in place. Several of these units would typically be turned into rentals after they are rehabbed.

Tax sales delayed

One of the ways that housing comes back on the market is after a tax sale. Most townships delayed tax sales for months—or even for all of 2020. These properties are often in disarray and not livable. The tax sale forces offloading of the property to a buyer who will get the property back online.

Evictions and foreclosures paused

The CARES Act, the CDC, and individual states have all issued stays on evictions and foreclosures in 2020. In an average year, there are approximately 2 million foreclosures and evictions. The first half of 2020? There was half the normal amount.

Many of these properties are abandoned. However, the bank or owner cannot get the units back online until they are able to move forward with the eviction or foreclosure process.

On the demand side, people do not want to co-habitate as much due to concerns about the coronavirus. This affects a wide range of housing—from college housing (roommates who may want their own units) to people in their 20s who may not want to live with their parents for safety concerns.

Finally, low interest rates make it more appealing than ever to buy a house.

Opportunities for Investors

All of this leads to a severe imbalance between housing supply and demand. So, as an investor, in what ways might this imbalance be beneficial to your business?

Here are a few suggestions of what investors can do in 2020:

Offer cash for keys

“Cash for keys” is a highly controversial topic for landlords. In essence, it’s encouraging a tenant to move out by giving them a cash incentive.

For example, if a tenant owes $2,000 in back rent and the security deposit is $1,000, a property manager may offer a tenant $500 of their security deposit if they leave the unit by a certain date and/or leave the unit in decent shape.

Typically, my company is not a fan of cash for keys. It creates a long-term issue with tenants expecting cash for moving out. However, the COVID situation is unique in that evictions are being drawn out to a point where paying a tenant half or even all of their security deposit can be a reasonable tactic for owners to take back possession of their rentals sooner, rather than later.

Rehab projects

Now is the ideal time to complete a rehab that you may have been delaying. Units are renting quickly, and it’s a huge advantage to know you can get a unit rented shortly after completing a big rehab project. Also, you may be able to get an extra $100-$200 in rent than you previously expected due to the demand for housing and lack of supply.

Rent instead of sell

If you are buying a new primary house to live in, it’s a great opportunity to rent out your house rather than sell it. The lack of supply means that your house should rent faster than normal. With a typical time to close of 45-60 days, you should be able to nail down a tenant to move in within a few days of when you move out of your house.

I personally did this, and it worked incredibly well. One word of caution is you may want to have a few extra weeks of padded time in case there is a delay in closing and your tenants need to move in. Alternatively, have a backup place lined up where you can live for a few weeks.

Buy a vacant unit

The year 2020 is a great time to acquire a vacant unit. One trick that we like is to market the unit during the closing process. Often you can actually have the unit filled with a great tenant ready to move in mere days after you close on the property.

Market units quickly

Market vacant units as soon as tenants give notice. A property management tip we employ is getting the current tenant to film a walkthrough video. This way prospective tenants can see the unit without actually having to be in the unit at the same time as the current tenant.

The Bottom Line

It’s been a crazy year! But you do not have to sit on the sidelines of investing if you use the market to your advantage. Try out some of the above tips. I hope you find them helpful!

What did I leave out of this important housing shortage discussion?

Let’s continue the discussion in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.