Impact of COVID-19 on Real Estate
This will be part of a mini post series I will be publishing related to my experience and assessment of how COVID-19 has impacted real estate investments.
The impact of COVID-19 on real estate is vast and takes various forms, there is no simple answer as to how far it will and has impacted the real estate market. No part of the business is safe from cash flow, regulation, imperfect markets and liquidity. I am no macro economist but the following is the impact I have seen on my own investments across various markets in Ontario and the action steps I took to address these issues.
Rents
The most commonly discussed impact of COVID-19 is on the rents owed by tenants. There have been numerous discussions and arguments by tenants in favor of deferring or simply not paying rent to landlords. This has been further magnified by the local, provincial and federal government parties supporting the notion that tenants do not need to pay rent to landlords.
The problem with this idea is that many landlords are small mom and pop investors with one maybe two investment properties. Very few of these landlords have more than a month of reserve in their bank accounts. The government introduced various mortgage deferral programs to help ensure individuals do not lose their principal residencies. However a lot of these deferral programs were not meant for investment properties. Even if you do manage to defer the mortgage your expenses are not just limited to your mortgage. You continue to incur interest expense, property taxes, insurance and if you were paying for utilities then those as well. Therefore, collecting rent is imperative to staying a float as an investor in these unforeseen times.
To get a head of this, myself and a lot of other investors are communicating openly with tenants. The following is an accumulation of tips that I have received from various sources:
- Get ahead of the situation, ask your tenants if they anticipate any issues with paying rent on the first of the month
- The government has released various stimulus programs so make sure your tenants are aware of the resources that are available to them
- If a tenant claims to be unemployed as a result of COVID-19 be sensible. Be open to arranging a payment plan. However, first request evidence of proof of unemployment to ensure your tenants are not just abusing the situation.
- Do not provide a rent discount. This is one of the few cases where the RTA will actually harm tenants. The RTA states if you provide a discount in excess of the limitations provided that will effectively become the new rent.
I have personally followed all 4 of the above points and have only had to offer one tenant a partial rent deferral for half of their rent.
Sales have come to halt
Pre-covid I was planning to sell two properties.
Both were targeted to first time home buyers which appears to be the demographic that is most hesitant to enter into new real estate transactions. Investors that were selling properties that are more investment based have not had too much of a problem finding buyers in this market. Both properties were a week off from capitalizing on the crazy winter market. I saw the uncertainty that would be coming from COVID-19 and tried to list it prior to this hitting the stock market, however preparing the homes for sale took about a week too long. This negatively impacted my liquidity plans as both homes sat on the market for one and a half weeks with no offers and I chose to take them down.
The lesson here is to adapt and adapt fast. I quickly delisted the properties as soon as it was clear the market was going to be under quite a bit of turmoil.
One property has now been subsequently rented out as a cash flow producing asset. I am undergoing the refinance process before any unfavorable sales appear on the market. This will allow me to access my invested capital while keeping the asset as a cash flowing investment. Does it hurt my liquidity plan? Yes, but being adaptable in today’s market is key.
Next, I had decided to offload my second investment property that I had ever purchased. It no longer fits in my investment portfolio as it was purchased to hedge future price increases in the market I wanted to live in. Therefore, even if I do not make as much of a profit as I initially intended, I will be aiming to sell this property within the next few months. I chose to defer the mortgage for this project which buys me 6 months of time. In addition, this allows me to use this opportunity to fix up the property and optimize it for sale, which I have already began.
Once again, quickly adapting your strategy will allow you to weather the storm.
Renovation plans
We had renovation plans for a project we closed in the end of March and at the end of April. Both plans were to make the properties into student rentals.
With everything going on in the student rental market right now, and the difficulty for our existing tenants if we were to try to ask them to move, we had to defer our renovation plan. This strategy also allowed us to preserve our capital in these difficult times.
Luckily we purchased the properties with sufficient cash flow to allow us to carry them as is. Once this is all over we will begin our renovation plans to optimize the cash flow!
The rental market
This one is interesting.
Recently I have heard and witnessed a lot about drops in the GTA rental market (in terms of price).
In my opinion, the current impact on the travel industry and its correlated impact on Airbnb hosts is having a drastic short lived impact on the the condo rental market in downtown Toronto and other markets. Previous Airbnb operators have now converted their properties to long term rentals significantly increasing the supply of rental housing on the market.
At the same time, previous international students and individuals on work permits or other legal status, have returned to their home countries. While the impact this has had is hard to measure, it may be resulting in an increase in vacant units and an increase in supply in the rental market.
In addition, the increase in supply can also be attributed to (i) homes not selling on the market, (ii) people moving out to join their families and reduce their monthly fixed costs as a result of the current job market and quarantine (iii) individuals who would have normally moved out or looked for a place not entering the market.
I do believe this impact will be short lived.
If you have the ability to defer your mortgage and hold out from renting out your home right now, that would be the ideal strategy. In Ontario it is very difficult to increase rents as it is pegged to inflation. The tenants you place today could have long term impacts as you will not be able to significantly increase the rents, and you will be stuck waiting for the tenants to turnover.