How do you invest in commercial real estate during a crisis like the COVID-19 pandemic? These 4 tips will help you safely and profitably navigate the fear and uncertainty that paralyze most commercial real estate investors. By not following the crowd in two previous economic crises, the first in 2001 and the second starting in 2008, I was able to purchase properties at great prices and prosper during a time when most struggled.
“Be fearful when others are greedy and greedy when others are fearful.”
These are the wise words of Warren Buffett. There’s a lot of fear in the market today, which means it’s time to be greedy. He’s not advocating taking advantage of people in distress. When Warren says be greedy when others are fearful, he’s referring to a mindset. Among all this panic, the mindset is to remain calm and focus on buying real estate.
“Buy when there’s blood in the streets, even if the blood is your own.”
This is a quote from Baron Rothschild in the 1700s and it is still true today. A lot of people have taken a major financial hit due to the coronavirus. Even so, it’s still time to buy. So, if it’s time to buy the question remains; what do I buy and how do I invest during a crisis?
Investing in Commercial Real Estate During a Crisis
In my commercial real estate investing career, I have successfully weathered two major economic crises:
2001 Crisis: The Dot-Com Bubble
During this economic downturn I saw opportunity. An IBM plant was shutting down and moving to another state and immediately hundreds of homes went up for sale. People thought I was crazy when I started making aggressive offers on apartment buildings there, but some of my offers were accepted.
This is an example of having the right mindset. Being greedy when others are fearful isn’t taking advantage of people but making knowledge-based decisions. I purchased those properties because I saw that the tenants were blue-collar workers, not the employees of the plant. When the plant shut down, my apartments were still 100% occupied.
In the end I held on to those properties for about 13 years and they were instrumental in me investing in commercial real estate full time. My video How to Buy Your First Multifamily Apartment Building details that deal and the mindset you need to have to be successful in the apartment business.
2008 Crisis: The Great Recession
Most of us remember this economic downturn. During that time, I also saw opportunity and continued to buy apartments. In fact, from 2008 to 2010, we were able to raise our rents three times by 15% because of limited supply and increased demand. Due to the economic downturn people were not buying homes and instead moving into our apartments. As a result, coming up the other side of that 2008 recession our property values doubled. Unlike most people, the great recession was the most prosperous time in my real estate investing career.
4 Tips to Investing During a Crisis
Tip #1: Eliminate Emotion
Focus on facts, not fear. The more fear you have, the more emotional you will be and when emotions go up, intelligence goes down. Am I concerned about being able to collect the rents? Of course, but I’m not afraid because I have facts. Here are the facts:
- Expect a reduction in rents: Not everyone will be able to pay their rent at the beginning of the month, but we are prepared for it.
- We have reserves: When some people are unable to pay their rents, we have savings for each property to help us fill the gaps.
- Our government is helping: If we can’t collect all the rents and we use up our reserves, our government is providing help with mortgage payments. For example, Fannie Mae or Freddie Mac are allowing for a 90-day forbearance period if we can show we’ve been impacted by COVID-19 and can’t pay our rents.
- Small business loans and grants are available for commercial property owners: To help make payroll, buy equipment, and stay afloat.
- Homeland Security has deemed commercial real estate an essential business: Meaning that we can stay open.
Tip #2: Step Up Your Marketing
I know it sounds crazy when the herd is retreating, but this is not the time to follow the herd. We’re teaching our students to move forward and be even more aggressive in their marketing and looking for deals. The last few years the biggest complaints have been that people are paying too much for property and all the good deals are taken. Well, now because of the coronavirus, those same people are fearful and sitting on the sidelines. As a result, there’s less competition and we can be more aggressive.
Tip #3: Make Lots of Intelligent Offers
Don’t hold back. In 2001, when I made all those aggressive offers, 80% of them were rejected. However, the 20% that were accepted allowed me to leave my job and invest in commercial real estate full time. Market aggressively and make a lot of intelligent offers.
Tip #4: Raise Your Management Game
This tip is for those of you who have already closed on deals or already own commercial property. It’s time to raise your management game because your rents may be postponed. You need to pay more attention to your operations and think about the long-term because commercial real estate is a long game.
Focus on: expenses, cashflow, collecting whatever rent you can, and being a good operator.
Final Recommendations:
This is contrarian investing; we’re going against the grain. Although it can be very profitable, you can also lose your shirt. It’s very important that you learn from the best because for those of us who are older, an opportunity like this may not come again in our lifetime. Also, if you make a mistake you may not have enough time to recover, so be careful who you get your advice from during this crisis. I advise that you learn from someone who has navigated through economic crises already and prospered.
Lastly, if your 401k or your stocks are affected by the coronavirus, you may find my post How to Maximize Your Retirement Investments helpful.
