Investing In Property During COVID-19

Economic turmoil caused by a global pandemic has been an ever-present threat, especially in modern societies where millions of people cross borders every day.  Compared with the Global Financial Crisis (GFC) of 2007-2008, which highlighted poor lending practices (particularly in the United States), our banks started in a good position during the global outbreak of COVID-19. Nonetheless, the global economic crisis brought on by this pandemic has illustrated the importance of having a clear investment strategy and managing your risks. 

Recessions mean lower prices

When a recession hits, house prices typically drop. This is because property prices are determined by the economy; in particular, what happens to business profitability, employment rates, wages and salaries, and interest rates. Housing prices fall when there are many keen sellers and few confident buyers. Once COVID-19 is mostly eradicated, vendors will be more flexible when pressed to sell, which will result in discounted property prices.

Unfortunately, some investors will experience considerable losses in the current market. It’s expected that the resulting fallout will be larger and longer than the GFC. During the GFC there were a number of high-profile (high-risk) investors who lost the shirts off their backs, and it’s likely it will play out the same way this year for people with a similar appetite for risk. 

Recessions are not all doom and gloom

Low-risk investors who understand the importance of long-term planning will see this as an opportunity and work strategically to grab more of the pie. People who are going to benefit from the downturn are those that have strong liquidity, strong cash flow, and a balance sheet to pick up some well-priced assets when they’re available. With a clear investment strategy and risk management provided by Carlile Dowling, you can be one of those smart investors. 

It’s the locations that have been hardest hit by business closures where there will be a more pronounced fall in house prices. These will typically be areas that have relied on tourism to fuel the local economy. This means cities like Queenstown will feel the brunt of it. However, once borders reopen, we are likely to have high migration thanks to New Zealand being a highly desirable country, thanks to its ability to contain and manage the fallout from COVID-19. This is when we’ll see property prices spike back up in popular areas where housing is sparse, such as Auckland and Wellington. 

Investing in Property, Advantages

With mortgage rates and yields at historic lows, it’s still a great time to invest in property, especially when you have the means to do so and consider property a sound long-term investment. What is predicted to be a short, yet harsh, recession means there will be considerable buying opportunities for those with strong balance sheets. However, just like any other time, investments should not be made lightly. It’s important to do your research, create a solid strategy, and manage your risks. Let’s look at a few of the more obvious advantages of investing in property now.

Lower prices

If the record low interest rates don’t change, overall this will work to your advantage and hold longer term prices up. In the meantime, there will be an increase in property vacancies as businesses go under, which will bring about an increase in cash flow issues for landlords that will be under serious pressure to sell. This means better buying prices short-term.

Lower interest rates

Interest rates are directly connected to prices, which means when prices fluctuate, so do interest rates to compensate. All banks are in competition with each other and will present a range of attractive options to help you choose them.

Property can outperform stocks and bonds

The stock market is subject to several different kinds of risk and can be extremely volatile. If a country’s economy suffers, or any political issues arise, business stocks can suffer too. Stocks are also subject to the economic cycle as well as monetary policy, regulations, tax revisions, or even changes in the interest rates set by a country’s central bank. Investors who choose not to diversify their holdings, or rely on specific types of stocks are also setting themselves up for greater risks. Essentially, no matter how regulated, the stock market is the wild west. However, historically, real estate is resilient and has always come out the other side of a downturn more valuable.

Investing in Property, Risks

With property investments there are always risks. By assessing your risks you can weigh up what your best options are and create a clear investment strategy. Here are a few risks to consider before making that next investment decision.

Foreclosures and short sales

Be wary of what can happen if you fall behind in your mortgage payments. A short sale is a voluntary process where the homeowner sells their property for far less than what is owed on the mortgage. The homeowner will be required to pay the deficiency, aka whatever remains on the loan. Foreclosures, on the other hand, are involuntary processes that are initiated by lenders (usually banks) after mortgage payments have fallen behind for 3 to 6 months. Because the property is used as collateral, this is the last option for lenders, but a necessary one for them to recoup loaned funds. Short sales don’t damage a homeowner’s credit rating, however foreclosures can stay on your record for several years.

Don’t neglect a title search

Title searches are a crucial step when you’re looking to purchase a property. They help you discover vital information that would otherwise blindside you if you hadn’t taken the necessary steps. You could identify a hidden debt attached to the property, or you might even learn that the “vendors” don’t even have the legal right to sell the property to you. Title searches can unearth crucial information, from divorce proceedings to building code violations. It can be hard to know what to look for which is where Carlile Dowling comes in. With over 130 years of legal experience, our property experts can help ensure your investment is protected.

Leasing during a recession

If you plan to rent out your investment property as soon as you receive the property title, you may experience tenants that can’t or won’t pay rent due to a lack of income. In this case you’ll be exposed to cash flow issues beyond your control. You’ll need to ensure you have a buffer to support your repayments until the situation is remedied.

Property Fundamentals

Buying a property during a recession isn’t quite as simple as it seems, so it’s important that you remember a few key principles during your property search: 

• Be patient. If you want to purchase a property for as little money as possible, prepare yourself for a lengthy closing process. Banks tend to draw out short sales and foreclosures, leading to frustrations for both the buyer and seller
• Be smart. If you have the available funds to buy a property, there’s a good chance you’ll get a better rate on your mortgage than you would prior to the recession. Don’t jump at the first rate a lender offers; shop around and get yourself the best deal possible
• Be kind. Recessions force homeowners to sell when they aren’t ready, which can cause frustration and grief. Realise that what may be an ideal timeline for you may not be an ideal timeline for the property owner. Kindness goes a long way to bringing some light to an otherwise unpleasant situation. 

Nine Ways To Beat The Recession

To follow are nine strategies for investors to keep in mind in order to win during the next recession. 

1. Fundamentals are always important. It’s likely you’ve heard that investors make money when buying, not when selling the property, and that’s especially important when there’s economic uncertainty. A great deal at the top of the market cycle will protect your investment if, and when, a market correction happens. 
2. Having goals and a long-term strategy will help you weather multiple recessions and reduce your risk significantly. It’s important to focus on the big picture. 
3. In real estate, cash flow is king. A property that has cash flowing today is likely to have cash flowing during a recession. Even if on paper the value of your investment properties drop, if they cash flow positively, you’ll emerge from the recession a happy investor. 
4. Buy quality properties in high-demand areas. We don’t believe in recession-proof properties, however good properties in great locations will do better in a potential market downturn. 
5. Always analyse properties, and only buy at prices that make sense. Make sure you complete your research beforehand. 
6. Keep healthy cash reserves and don’t overleverage yourself. 
7. Don’t panic and sell at the bottom of the market. Even if prices drop, they will recover. Economic cycles make property values fluctuate, but over time, real estate historically always goes up. 
8. Make good out of a bad situation. Take the opportunity of a recession to score a great deal on an investment property that will get you one step closer to financial freedom. 
9. If you stay ready, you don’t need to get ready. Opportunity can knock at any moment so keep your eyes open and stay up-to-date with the market’s fluctuations. 

No one comes out the other side of a recession unscathed. However if you remember the fundamentals, assess your risks and play your cards right, you’ll come through right side up. To get started on your investment strategy and manage your risks with an experienced property law solicitor, get in touch with Carlile Dowling at 06 835 7394 or mailbox@cardow.co.nz.