Do landlords deserve rent payments in these times of crisis? As the economic shutdown crushes tenant incomes, should they have to pay? We'll dive into this complicated issue from the landlord's perspective and how it will create opportunities for individual real estate investors.
Do landlords deserve rent payments in these times of crisis? As the economic shutdown crushes tenant incomes, should they have to pay?
In this post, we examine the issue from the landlord's perspective — the moral and business implications, how too much debt has made the issue even worse, and what are the best options from here...
We'll also dive into how you as a real estate investor are in a position to benefit. As these highly leveraged properties face a capital squeeze and are forced to sell, prices will be pushed lower and create some incredible buying opportunities.
There was a recent news story today about a big real estate investment firm in the UK trying to sue their tenants because the majority of their tenants stopped paying rent this month.
For some context, they're a massive firm with hundreds of millions of dollars in real estate.
They're focused mostly on commercial real estate, so many of their tenants are big restaurants and offices. In other words, this is all real estate that no one can use right now given the global lockdown.
Nobody is going to restaurants, so clearly they're not generating any income and they're in an increasingly dire financial state.
In this case, we think the company has made a grave mistake. They are a giant corporation that's made some bad financial decisions, and they're going after tenants that simply don't have the funds to pay anyways.
Too Much Debt
This company became so over-leveraged with debt to be able to expand to a vast portfolio of properties, that they can't even deal with one month of missing rent.
That's absolutely insane. A house of cards, collapsing without one month's income.
You'll see a lot of the big real estate gurus like Grant Cardone advocating to take on more and more debt. 'Take on as much debt as you can... Don't have any equity in property... As soon as you have equity, refinance that equity, and put that equity into new properties and get more and more debt because you're always getting cashflow. You're always making money. There's also appreciation on your real estate. It doesn't make sense for you to keep equity in a property'
Well, now we're seeing why that might not be the best strategy. And if your business can't withstand three months of not getting rent, maybe you're over-leveraged.
And the situation is likely to worsen as we'll realistically see tenants ability to pay rent severely hindered for many more months (and years?) to come.
But Are Tenants Morally Obligated?
There isn't much of a moral argument. A lot of landlords are going to have to suck it up, because their tenants simply can't afford to pay. It doesn't matter if you agree or disagree with that.
You can't kick out your tenants right now, because most places have imposed a moratorium on evictions. Even if you could, it's still incredibly difficult to find new and qualified tenants right now as well.
So landlords need to be working with their tenants. This is the time to be working, making deals, giving leniency, trying to understand your tenant's situation, and find a happy middle ground.
Opportunities Will Emerge from this Crisis
For us individual investors, this will likely create some compelling opportunities. Us smaller and mid-size investors lack the access to capital and leverage that folks like this giant real estate investment firm enjoy.
However, all of those mismanaged properties are gonna be coming onto the market all at the same time. No one will be renting them and their incomes will essentially vanish, and then prices will dramatically plummet.
Granted, cashflow will continue to be scarce in this environment for some time to come. Nevertheless, it's becoming a great time to acquire real estate given these conditions of motivated sellers and ample distressed inventory.
This is especially true of who have cash in the bank and don't need any leverage, because you should be able to buy up very cheap properties in the next 12 - 18 months.
Understand that you're not gonna be making much in rent this year, but in a year, maybe two years, the economy will eventually come back. It always does. And when it does, you'll have a piece of property that's not over-leveraged, that you own, and that you're generating steady passive income on.
Now is the Time to Research and Line Up Your Prospects
While we're under lockdown right now, we've been thinking a lot about what international markets we'd want to be investing in. Where are the highest potential property deals going to start appearing?
We've been spending tons of time researching how we can diversify assets into new countries. Right now, we're looking very very closely into Colombia, Turkey, and even our home market of Thailand.
While there's still time for things to shake out, this time can be used wisely to research and understand these markets, learn about the currency risks across different countries, figure out the local laws and regulations, etc. You can be doing this all online, safe from your quarantine hot spot of choice.
In fact, you join our free real estate investment course, link below, we have lots of information too about all the different countries, where they rank, and how you can invest there.
The Crisis Will Flush Out Bad Habits
If nothing else, this crisis should refresh our perspective and application of debt — when it is appropriate, and when it becomes excessive.
We also think it'll bring about a renaissance of new investors that are coming up, whom will adopt a more structurally sound approach. Similar to when the banks collapsed in 2008, and then the government stepped in and made them shore up their balance sheets.
It seems likely we'll see a lot of real estate funds and managers go out of business. However, the companies that last and the new companies that are get built will be far stronger, with better balance sheets and more cash reserves.
Inevitably, we're in store for both good and bad times ahead. So, we're going to save up a little bit of our money in the good years, and buy up in the bad years. The pandemic has kicked off a great culling for the market, and we think it will present many solid buying opportunities for small and mid-size investors.
Remote Ventures is an international real estate investment company building software to help you scout foreign markets, find up-and-coming neighborhoods, identify and analyze properties, close deals, and turn them into cash-flowing investments.
Sign up for our free 12-week real estate course here — realestate.remoteventures.com
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