Should You Be Investing In Real Estate Right Now (May 2020)

April 30, 2020

There seems to be a lot of misinformation in the multifamily rental space regarding what investors should be doing with their capital. I'm writing this post as of May 1, 2020 and hope to convince you, against my self-interest, that it's not a great time today to be looking at real estate.

While the stock market has recovered it's still down about 10% from a month a go. As an investor in any asset class our goal is long term wealth creation through appreciation of our assets. At any given time different asset classes are in different cycles. Real estate has always lagged behind the stock market in adjusting for price. Given the nature of transactions on the stock market the speed at which prices can move is greater than hard assets such as real estate. It's a reasonable assumption that real estate and the stock market will eventually return to similar ratios they were at before Covid. Meaning that either real estate prices will adjust down OR the market will go up. In either scenario it makes more sense to be in the stock market right now.

There are also factors within the real estate space preventing price movement. Many lenders are offering property owners rental deferment up to three months. All of my owners I manage for have taken advantage of these programs. If you remove debt service from a property then the expenses fall dramatically. Because of this very few property owners are hurting right now. As the old adage goes "wait 'til there is blood in the streets."  With deferments and the halting of all foreclosures there is not an incentive to sell property at a lower price. This will slow down the drop in price of residential real estate. Houston prices are down less than 1% overall. Until notes become due again I don't foresee any pressure on sellers to sell their property.

Another consideration is that underwriting requirements for new debt are much stricter right now. While you can get a loan, the loan to value is much lower  right now. Buyers are also required to provide and account for the Coronavirus in their investment plan. Stricter terms reduce the buying power of investors. So while sellers are receiving payment deferrals buyers are facing tighter purse strings from lenders. Normally tighter debt requirements would push down prices, but instead the gap between buyers and sellers has grown leading to very few transactions.

My goal as an apartment investor and manager has always been to provide the best investment advice that I can. If I give you advice that makes you money then you'll hopefully invest in a future deal. The bottom line is that with the stock market on sale and multifamily having very little movement in price multifamily today is just not a great asset class to be pursuing. I see myself as a fiduciary of my investors hard earned dollars. Let's wait until the market conditions are right and pounce on opportunity.

Real estate prices will come down. As mortgage payments become due again some sellers will want to have stronger cash positions and thus consider cashing out through selling their property. Lending terms will improve as well restoring buying power. More deals will get done. Watch the market, interest rates, and the opening back up of the country. Improvement in these areas will lead to deals. Remember that anyone who bought real estate in 2010 two years after the crash did great. Patience is key.

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