Crisis happens when we must make important decisions quickly in uncertain times. The information is incomplete and conflicting. The relative importance of various factors differ from what used to be true.
The lucky and the wise do amazingly well. The unlucky and the foolish suffer most. Most people drift and end up wherever the current takes them. That’s where most people, including rental owners are right now. They’re waiting for clarity. Then everyone will understand the situation and it will be too late to develop competitive advantage.
I invite you to develop some opinions and to get a head start. California’s population boom began with the gold rush. Early-comers had their pick of opportunity. Some got lucky and got wealthy. Late-comers fought over the tertiary scraps. Levi Strauss became wealthy selling them all canvas pants.
Two Questions to Ask
You can ask many different questions about the future. Here are two that I think are important if you’re a real estate investor.
What do you expect the new normal to be like? This is an opinion, not knowledge. Peter Drucker reminded us that we can only know two things about the future. We know that it will be different from the present and past. And we know that we won’t be able to predict the details.
How will the future you imagine affect investment real estate? This is another opinion. Develop your opinions by considering the opinions of experts.
One Expert’s Opinion
Last week I was part of a national “invitation only” webinar featuring the most widely recognized economist who focuses on income property. KC Conway is the expert’s expert. He worked at the Federal Reserve during the Great Recession. He’s now the head economist at CCIM. That’s the organization for the professionals with the Certified Commercial Investment Member designation. Enthusiasts claim CCIMs are the nation’s top 2% of income property brokers.
Conway suggests how the virus may affect national income property over the next few years. Some of his guesses will be right; some will be wrong. Because of his reputation and position, 20,000+ of the most influential income property brokers and 100,000+ property owners will seriously consider his expectations as their future choices.
Conway notes that renter households are more vulnerable. They generally have less savings, more debt and fewer job options. That makes it likely that many will default on their rent. Conway thinks apartment values are likely to drop 10% nationally. They will drop even more in some markets.
There was a score of other ideas. If renters do scale back how do you protect yourself or even better, how do you improve your position?
California’s Unique Political Reality
Last November California voters rejected rent control 3 to 2. Months later the governor and legislature imposed rent control anyway.
The state and many local jurisdictions have decreed rental owners are the lenders of first resort for tenants adversely affected by the virus. Rental owners can’t evict tenants affected by the virus or recession and are mandated to grant interest-free loans for rent.
Within the last month California legislature is considering a more intense bill. AB 828 decrees that any tenant can have a temporary 25% deferral or maybe reduction in rent for a year. Courts are to assume that tenants have been harmed by the virus. The law is unclear whether tenants have any obligation to repay that deferral. That bill is not law.
A year ago, who could have imagined such a notion would be seriously considered? When you bought your first rentals, was this the political environment you expected?
Your crystal ball may be clear and bright. Mine’s a bit murky and cracked. The future will come, ready or not. Most owners will drift, not knowing where the current will take them.
Neither you nor I are certain of the future. If you’re serious about acting SOON, I’d love to have an extended conversation based on your unique hunches.
Usually I invite readers to write, this time I invite you to call me 858-554-0576, sheltering at home, or email me using the form at the end of this link.
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”