Difference Between 2008 and Coronavirus Pandemic on Real Estate
During a recent conversation with Joe Fairless, Chris Clothier discussed the differences between the 2008 real estate market crash and the coronavirus pandemic’s effect on the real estate market. Clothier, one of REI Nation’s partners, owns between 12 to $15 million in residential holdings and commercial real estate. This article is based on the information shared by Clothier during the interview.
In 2003, Clothier’s family started a company called Memphis Invest in Memphis, Tennessee, and later rebranded it as REI Nation. REI Nation currently manages a $100 million portfolio consisting of over 6000 single-family homes. The company operates in Tennessee, Texas, Oklahoma, Arkansas, and Missouri. Most REI Nation clients engage in passive investing, not wanting anything to do with the day-to-day property management.
The 2008 Real Estate Market Crash
In 2008, some people invested in real estate properties that were not qualified and over-leveraged. These transactions created an unsustainable inflated value of properties. Bear Stearns became one of the earliest casualties of the mortgage crisis that led to the 2008 market crash.
Fannie Mae changed its practices of financing investment properties, reducing the number of properties that a person could finance from ten down to three. Therefore, an active investor who was investing in ten properties could only fund three of them, causing them to cancel the other seven. The canceled transactions were the beginning of what eventually turned into a full-blown crisis in the housing market.
The Coronavirus and the Real Estate Market
The problem created in the current real estate market comes from a mixture of bad news and fear. No one has seen the actual impact that the Coronavirus will have on the market yet. The determining factor will be how rent and mortgage reductions will affect the market. Within weeks after the Coronavirus appeared, investors went from full occupancy in their rental properties to collecting percentages of rent. With the 2008 market crash, investors were able to see it coming, giving them time to prepare. However, the pandemic appeared suddenly.
Planning for the Unexpected
The best thing any investor can do during a market crisis is not rush but to take time to analyze what is happening. The message REI Nation sent to their 2000 clients is that they were preparing daily.
In 2008, there were so many things happening that you had to have a backup plan. Then you needed a backup plan to the backup plan. It didn’t matter if you were the landlord over several properties or a small business owner. Because things were so uncertain, you had to try and plan for every possible scenario.
REI Nation planned as best as it could. No one expected there to be a global pandemic. How could they? However, when involved in active investing, you must have a contingent plan on how to operate in the event something goes wrong.
When you have spent the time planning for the unexpected, you can be confident in your actions. Preparing for the unexpected helps to place investors in the best possible position under any type of circumstances.
Treatment of Tenants During the Pandemic
At the beginning of the pandemic, there was no reason for REI Nation to contact the residents to tell them anything. All residents knew their rent was due on the first of the month, which did not change. So, there was no reason to generate any mass statement about what REI Nation expected.
However, REI Nation did communicate with their residents on an individual basis when they contacted them about their particular situation. They provided residents having hardships with a resource list of places they could turn to for help. When residents could not pay the total amount of the rent, they encourage them to pay what they could. That way, REI Nation could tell the owners that the tenant was doing their best to meet their obligation.
The pandemic entails more than just not paying the rent. Tenants who live in apartments had to abide by rules regarding the use of amenities and social distancing.
Some companies gave their tenants a blanket discount of 15% off their rent. REI Nation did not do anything like that because everyone was not having issues with paying their rent. Over 30% of REI Nation’s residents paid on time. Many of the residents paid early because their bank automatically debits their payments.
REI Nation has a fiduciary responsibility to its owners to make sure they act in their best interest. Therefore, they could not treat all cases the same. In some instances, REI Nation had to work with the tenants. They offered some tenants discounts or asked the owners to work with them.
REI Nation expected the tenants who could pay their rent to do so. Then, they worked with the ones who were not able to pay. For example, if a tenant presented a verifiable hardship and made an effort by paying 10% of the rent, that left 90% unpaid. Even in that scenario, REI Nation handled it on a case-by-case basis.
The company’s goal was not to put anyone out of their home or in further hardship. They also did not want to send a message to all tenants that they did not have to pay their rent. Either on their own or with the help of financial assistance, the tenants paid what they could. Many owners who knew their tenants contributed what they could afford accepted that their revenue for that month would be slightly less.
When Will Investors Notice the Market Effect?
In the future, investors can expect foreclosures on a variety of properties in different neighborhoods. Vacancies will increase, and rents will decrease. During the crisis of 2008, investors saw the effects that the real estate crisis had on the market by 2009 and 2010. Within two years, the 2008 market fall affected everyone.
The coronavirus crisis is entirely different than the one in 2008. However, financially, it’s about to become difficult for people to stay in their homes and avoid foreclosure and evictions. It’s unavoidable. It took about two years for it to happen back then, and it will probably be the same now.
With the Coronavirus, investors know that it is something the country will get through. The faster that happens, the more negligible effect the Coronavirus will have on the number of foreclosures and where they occur. Most likely, an adverse impact on the real estate market will not be widespread. However, the longer the Coronavirus goes on, investors might see damages coming six to nine months down the road.
Hope Versus Uncertainty
The difference between what’s occurring during the Coronavirus and what happened with the 2008 crisis is hope. After the 2008 crisis, there was a fire sale of properties. It should not be that bad after the Coronavirus. During the Coronavirus, some people saved their money, anticipating things to correct themselves. They had no idea the current situation with the virus would exist. If there are distress properties, there will be a lot of competition for them. In 2009 and 2010, there wasn’t any competition for distressed properties because of the economy’s uncertainty.
Any active investor who survived 2008 would advise new investors to expect future investment opportunities. However, no one is hoping for people to have to liquidate their properties. Most people involved in active investing are hoping for a calm recovery and the ability to get out of the crisis without high losses. A person who’s interested in investing in real estate should practice good fundamentals. They should know they can always find good deals and don’t have to hope for a massive crisis to make huge profits.
Planning Is the Key
Everyone should have a plan. Regardless of what stage of the process an investor is at, they must always start planning for the worst-case scenario. It would help if they frequently communicated with their lenders and clients. If there are any lessons from the Coronavirus, it is that no one is in control. No one knows what is coming next in passive investing. So, it is wise to plan for every possible scenario. Having a plan and executing that plan is what will get you through any crisis. It worked during 2008 and 2009, and it will work today.
REI Nation did not have to rush to develop a message to communicate to their clients. That’s because they had already started a regular practice of keeping their clients informed. For the past twelve years, they spoke with their clients to let them know their investment status. When it was necessary to put out a specific message, they placed a video on their website. REI Nation’s handling of the market during the coronavirus crisis thus far can be an example to others involved in active investing.
REI Nation has a blog and video series for investors on its website. The information is available for free to anyone who wants to view it. Clothier is active on social media and sites like BiggerPockets.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action