It’s Tuesday, March 10, 2020 and we have officially known about the novel coronavirus 2019 for three months. Scientists have been working hard and we know more about this virus in such a short time than we have about viruses ever before. But three months is not enough time to know all we need to. So we are left with a lot of speculation and ‘best practices’. Nobody is telling us the ‘best practices’ for our real estate investments.
Today, according to CNN, more than 113,000 people are infected and 4,000 are dead. The entire country of Italy is on curfew and has had a total of 631 deaths, 168 in the last 24 hours. More U.S. states than not have experienced infected people, many of whom we can’t tell where they encountered the virus. This scary fact means that we will see many more cases in the near future. I work in the ER in 3 days and I predict that South Dakota will have seen its first case by then.
Yesterday, the Dow Jones Industrial Average dropped over 2,000 points, the largest point-drop in history. You better believe that the coronavirus is having an effect on your investments.
It’s climbed back ¼ of that today but lest you think we are in the clear, let’s look at the past 6 months:
Our leaders rightly worry about causing panic but sometimes they fail to tell the whole story. I work in the Emergency Department so that means in I’m on the front line of this virus. I also invest heavily in real estate.
How Will the Coronavirus Affect My Real Estate Investments?
And here we go, right into the speculation. Let’s first look at it from a medical standpoint. I’m not here to spread panic and doom. The virus is essentially a cold virus that seems to be more lethal than the typical virus. It is less lethal than many other viruses out there. It is contagious, but it is less contagious than many other viruses out there. There is no cure and there is no vaccine. The problem is that it has a combination of contagiousness and lethality. It’s too early to know exactly how much of both of these qualities are present. I’m a physician but not an epidemiologist. I’m an investor but not a broker. What follows are my general opinions and recommendations. They may not apply to your specific condition.
1. REITs are Not a Safe Haven
I’ve been harping on this for the past 2 years here: Diversification does not mean investing in different stock sectors. A bunch of internet articles recently have said to invest in REITs. Your stock broker and your financial planner have been telling you to buy more stock but they don’t tell you that the stock market is one whole entity. All ships rise or sink with the tide, some more than others, but there is good evidence that your broker is probably worse than the average. If you have been wanting to invest in real estate and he told you to invest in REITs (Real Estate Investment Trusts) you are probably a sad bunny today. The FTSE NAREIT All REITS Index has dropped about 7% from March 5th. Avoid REITs.
2. Mortgage Rates Drop
The Federal Reserve lowered the federal funds rate and banks lowered the Prime Interest Rate to 4.25% on March 3, 2020 largely in response to the coronavirus crisis. In July, the Prime Rate was 5.50%. This is a huge decrease. It makes me think that someone is panicking. The decreased Prime Rate traditionally has an impact on home prices. The buyer is now able to pay more for the property because she pays less for the mortgage, and the seller is encouraged to ask a higher price. Lower interest rates usually mean higher real estate prices.
People are getting afraid of what will happen to them with the Coronavirus. Uncertainty means less people will be looking to buy. Decreased demand drives down prices so I suspect that the decreased Prime Rate will help to prevent the floor from dropping out of real estate but we won’t see much change in sales prices due to the drop in demand. If you have cash, now may be the time to buy, as you are likely to get a low interest rate for your mortgage and the sales price will not be higher than it has been in recent history. The caveat to this is in how long the virus will remain active. The typical virus is seasonal but leaders at the CDC have stated they do not know if the virility will die down over the Summer months. There is just not enough data yet from the Southern Hemisphere, where it is Summer, to make a prediction. My belief is that the panic will die down in 4-6 weeks which means now is the time to buy Real Estate (not REITS).
3. Food-service and Retail are Hit Hard
Any discretionary retail, food, or service will be adversely affected as people will not want to go out in public. In fact, look to Italy as a case study: The entire country is on lockdown, but the virus continues to spread. Will other countries seek to impose a similar lockdown earlier in their infection cycle? I suspect so. Borders are restricted or closed and basic goods are hard to find as imports are diminished. This will lead to hording and shortages, even in times when the death rate is low (to date, there are only 463 deaths in Italy, a country of 60 million). Due to the lockdown supply chains will collapse and retail will run out of product. Purchase some extra essential products but don’t hoard. You probably won’t need that much and a lot of it will spoil. People are going to want to save money and avoid crowds, hitting vacations and retail hard.
4. Hotels and Air BnB will Hurt
These operators, of which I am one, will see a dramatic drop in occupancy. President Trump has indicated that he will look into tax breaks for airlines and cruise ship operators, but will he do the same for hotels and restaurants? I’m not sure the funding is there. Air BnB operators like me will see severe decreases in occupancy. One way to mitigate this is to open your property up for long term rentals. People will still need a place to live.
5. Rent Payments are Missed
This is one of the largest concerns that you will have as an investor. If you are in the commercial space, renting to retail operators, the tenants will have difficulty paying the rent (see above). In the residential space, tenants, who are typically hourly workers, might get sick or be told to stay home by their employer or the government. They won’t be bringing home income, despite Mr. Trump’s promised tax break, and they will have difficulty paying the rent. Hold or stop your discretionary remodeling or repairs now and save the money to pay your essential repairs, utilities, taxes, insurance, and mortgage. Be prepared to speak with your tax collector and bank early should you find your accounts drained. Do not try to conceal your hardship! Times like these hopefully will spark some lenience in your creditors. Do the same for your tenants. Don’t advertise this, but consider accepting rents late without a fee for those who have hardship.
Take Home Message
This post is not to make you panic. You don’t need to go out and buy all the stock of toilet paper. Sure, you can’t get hand sanitizer, but soap has always been better. Keep a prudent stock of nonperishable food and supplies. Save your businesses’ money rather than spending it until the crisis passes. If you have money you want to invest, avoid stocks, and go with real estate. Avoid large crowds if you have cardiovascular disease or are over age 60. All reasonable things to do, even during normal times. Work together and help each other and we will get through this. Lastly, remember that this isn’t the first time we have had a global health crisis and it won’t be the last. Let’s take the education we learn from this and use it next time.