Stage 1 – Unemployment Rises
Right now, we’re in the early stages of the recession, with unemployment continuing to climb as more and more businesses feel the full effects of the coronavirus lockdown. As of this writing, there is worse unemployment than we have seen the Great Recession.
By comparison, during the Great Recession of 2008, 2.6 million people were unemployed. This means that the current coronavirus recession could be more than X? times worse than what we saw a decade ago.
Stage 2 – Government Stimulus
As we’ve already seen, the government has stepped in in an attempt to keep the economy afloat, through the stimulus programs for individuals and businesses. While good for the short term, the government can’t keep printing money forever, so it’s likely that this stimulus will serve as just a temporary band-aid on a much larger problem.
This money one of the reasons why April and May rent collections continue to be relatively strong for landlords who specialize in working tenants. Most people haven’t been out of work for that long yet, and the money helps to cushion them financially for the time being.
But the question is, what will happen if and when the money runs out, people still aren’t back to work, and the economy still hasn’t recovered?
Stage 3 – Loan Defaults
During the next stage, as the recession continues and businesses continue to close down or operate at diminished capacities, we will start to see a wave of loan defaults. As tenants are not able to pay rent, and many property owners deplete their reserves, we’ll start to see more and more loan defaults, both for residential loans as well as for commercial loans.
When this happens, banks will start to take over many of those properties, as they did in the years following the Great Recession of 2008, which brings us to the next stage.
Stage 4 – Bank Repossessions
As property owners default on their loans, banks will start to foreclose on those properties and take over those properties that are not sold at auction.
This is when we’ll start to see a wave of bank repossessions & properties start to hit the market, as we saw in the months and years following the Great Recession.
Banks are not in the business of property management, so often, they’re itching to offload these properties quickly and thus, at a discount. This is when you should get your checkbooks out and prepare to buy. However you will still have working tenants that could be struggling.
Stage 5 – Time to Buy
As those bank Repo properties start to hit the market at a steep discount from the prices we saw at the peak in 2019, that’s when you know it’ll be time to buy.
The question is, when exactly will this happen? The short answer is, it depends. It depends on a LOT of factors, to be honest. The full effect of the coronavirus lockdown is yet to be seen, and the coming months will be very telling.
Based on the speed at which the real estate market typically moves (i.e., not very fast at all), it’s safe to expect some amount of lag. What that means is that it’s very unlikely that we’ll hit this time of recovery before the end of 2020. The earliest that we might see bank REOs come on the market is in 2021.
Thus, now is the time to be patient and to make sure that you have ample liquidity prepared for when the time does come to buy. And if you’re investing actively in property you might want to consider social housing. Social housing is accomodations provided to Ayslum seekers, domestic violence, homeless and others unfortunate. Their rent is underwritten by the local councils or home office. This is the niche I focus on and have focused on since 1994. It is safe and consistent returns. Even if the markets go down, I am still getting paid and even look to buy more. The only issue is that I am cautious and use very low leverage. I use the Kevin Green model, sell 2 properties and keep one. This is safe and lets me grow my portfolio.
Stage 6 – Inflation
The final stage that we can expect to see is inflation. This is inevitable, as the government just printed trillions of dollars out of thin air. With that much extra money floating around, there’s bound to be inflation.
But here’s the thing. Inflation is actually a good thing for all of us as property investors. Why? Because inflation means that your money is getting devalued. That same pound from 2019 might only be able to buy a fraction of what it can buy in 2022.
That’s great as property is a hedge against inflation. Even as your money becomes devalued, you are still collecting rents & the value of the property increases just due to inflation.
This, on top of the benefits of cash flow & deduction of mortgage interest, is yet another reason why we should all be investing in property.
There’s no doubt that we are living through unprecedented times with the coronavirus lockdown recession. There’s a lot of uncertainty about exactly how bad this will get and how long it will last.
However, by looking at the economic fundamentals, and by looking at the patterns and sequence of events from previous recessions, we can predict the high level stages that we’ll see in the coming months and years, as well as what will happen to real estate during the recession and recovery.
Whether you are new to property investing or have been waiting for years for this downturn, buckle up, because we’re about to see some once-in-a-lifetime deals flood the market in the coming months and years.
While you are waiting you might be missing out on cash flow. That is why I am still continuing to buy properties, give the properties to councils, charities and PLCS. Cash flow is king. Time is money.
Thoughts and questions?