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photo Terrie Schauer Alex Avery

Interview with Alex Avery : The Wealthy Renter’s Real Estate Advice for Covid-19

 

Real Estate Advice for Covid-19: What The Wealthy Renter Has to Say About Investing Now

How Are You Using your Covid-19 Crisis?

Covid-19 Crisis has us transforming confinement-psychosis into new pass-times. Amateur bakers and hair-stylists are popping up all over the place.

I admit I’m going through a lot of flour these days, but I also decided to have as many interesting conversations as possible. My goal is to connect with people who have insights, especially on Real Estate investing during the Covid-19 Crisis. Last week, I spoke with a favorite real estate author of mine, Alex Avery. His book, The Wealthy Renter, changed the way I look at home-ownership.

Is this a good time to get into the Real Estate market as a home-owner or an investor? See what the author of The Wealthy Renter, Alex Avery has to say. Here’s some of his Real Estate Investment Advice During the Covid-19 Crisis.

Is Your Home an Investment?

Avery’s thesis is that home-ownership (in the principal residence sense) isn’t the “investment” it’s touted to be. He’s suspicious of the advice that we must all “stop throwing money away on rent”. When he unpacks this statement, it appears as questionable investment advice. Home ownership makes investment sense as a premise if – say – a savings of 2000$ or whatever per month on rent justifies using a large amount of seed-capital (read: down-payment) to then carry a (possibly larger) mortgage payment.

For an investor, the answer is often “It doesn’t”.

Use Your Capital Wisely

In investment terms, capital should be placed where it generates the best returns (correcting, of course, for risk – eg. betting on the horses might give you good returns, but I wouldn’t recommend it as a sound investment). If we use our hard-earned seed capital as a down-payment for a single-family-home, our returns will be sub-par.
What return does this so-called “investment” generate?
  • It provides no cash flow or dividends.
  • Maintenance- and interest costs are out-of-pocket and not tax deductible.
  • Home owners have a tendency to spend MORE money on maintenance, upgrades and extras than owners of rental properties.
  • The mortgage on our homes get with after-tax dollars (read: with 50 cents out of a possible 1$).
  • We don’t have tenants to help pay our mortgage.
  • Yes, a principal residence is an appreciating asset, unlike – say – a car or a washer/dryer set. But then rental properties appreciate too.

Your Home as Consumption Not Investment

Avery’s distinction can be summarized as follows: the money you put into your home – in the form of a down-payment, as upgrades or as mortgage payments – is basically a form of consumption. If you have disposable capital and cash-flow that you want to “consume” in a single-family home as a lifestyle choice, go ahead. Avery himself admits to being a home-owner. But it makes more sense to view a principal residence as an object of consumption and not as an investment.

 

How Do I Make My Real Estate Plans in the Covid Crisis?

Avery has a few points of advice on this question.

  1. He advises that, if you have plans to buy a home, it may be wise to review how much leverage you take on. The economic downturn, he projects, will be more check-marked than V-shaped.
  2. As an asset class, Avery sees residential rental buildings doing fairly well. Federal and provincial governments have launched stimulus plans that secure the minimum income of the vast majority of workers. As a result, he doesn’t see massive residential rent defaults in the cards.
  3. Beware of commercial Real Estate. Commercial rentals were on a downward trajectory before the pandemic. Retail had begun to move online pre-Covid. Many companies were already running experiments in tele-work. The Covid Crisis will accelerate both of these trends, probably irreversibly.
  4. If you want to invest, choose a market with “land constraints”. For example, Toronto is bounded by the Green-Belt, the island of Montreal by water, and Vancouver by the sea and the mountains. Avery sees these markets as being more “recession proof” than, say, secondary markets like Quebec City, Calgary or Kingston. In the American crisis of 2008, markets like New York fared better than, say, Las Vegas, where builders could keep constructing ad infinitum.

 

When Everyone Has an Opinion, Who Should I Listen to?

Covid or not, Avery’s last piece of advice turns on where we get advice on Real Estate investing decisions.

  • Your father-in-law who bought his home in the 70s and hasn’t been in the Real Estate market since? Probably not the best source.
  • Your real estate broker who makes commission on home purchases or sales? Also not the best source of advice, because there’s an obvious conflict of interest at work (he or she gets paid when you sell or buy ANYTHING, not when you make good investment decisions).
  • Active players in the real estate industry. Investors, economists, experts with established track records in their field, or professionals make money whether a transaction takes places (accountants, independent consultants, property managers etc.). They are probably better sources.

Want to Learn More?

Purchase Alex Avery’s book The Wealthy Renter here.

Or check out my book The Mindful Landlord.

Covid-19 for Landlords: Property Management in the 2020 Corona Virus Crisis

Why Corona Virus Doesn’t Have to Rhyme with Rental Crisis

If you haven’t read the Spencer Johnson’s famous book Who Moved My Cheese, now may be a good time. It’s short. Don’t worry, I’ll wait.

Go read it and then come back here 🙂

In one line, Johnson’s point is this. We have a tendency to become over-reliant on using the same strategies for getting our “cheese” (whatever that might mean, metaphorically, think gangtser rap $$$$). When someone or something moves our “cheese”, we panic, become angry, depressed, despondent, hungry, stressed, confused, you name it! When the most effective reaction might be to zoom out (using ZOOM right now maybe), and reconsider our habits in light of new circumstances.

I invite landlords, real estate professionals or anyone else, to zoom out and consider what might be happening to our cheese.

 

The New Normal

Situations in Quebec and across the globe are evolving rapidly. Depending on what sources you listen to – the IMF, our politicians, economists proclaiming the start of the next Great Depression – it’s hard to know which way the economic ball is going to bounce. Will Canada be insulated by early curve-flattening and smart financial stimulus packages, or are we really the tip of the tail of a very large macro-economic dog?

There is no shortage of opinions, and so it’s hard to come up with mental- and economic models that can guide our behavior.

This is perhaps the biggest challenge right now. We have no proper models on which to base our decisions.

 

Mindful Landlording Right Now

If there’s a lot of uncertainty around, let’s look at some of the things we do know. Perhaps if we focus on concrete, local and immediate problems (where is my cheese today), we can navigate our way, and make sure that at least we remain poised for the next few months.

That’s what I tried to do in this interview with the Real Estate Investor’s Club last week. My goal was to offer some concrete and practical ways of addressing the current situation with respect to issue that face landlords, property managers and investors right now.

 

Concrete Problems, Concrete Solutions: Covid-19 for Landlords

So, what are some of the issues landlords and Real Estate Investors are facing right now?

Rent Payment

Lay-offs, confinement, and business closures have posed serious financial problems for many residential tenants, many of who live paycheck-to-paycheck. In April, around 25% of the residential- and commercial tenants managed by my agency reached out to discuss some kind of rent relief.

Our approach was the following:

  • First, to sympathize (in the case where the tenant has always been responsible with payment in the past) and to turn things around. Many tenants called in asking: “What is your policy for rent this month?” To this, we answered : “How would you like to pay your rent this month…?” What resulted, in all but 5% of cases, were payment plans. Many tenants are now receiving government assistance. If a large lump-sum up front is difficult, we allowed them to design their own payment plans (paying by the week for example, instead of monthly), with the proviso that the total rent due needs to be in before the 21st (the magical Regie non-payment date). With this strategy, we’ve reduced out default rate to about 8%, when pre-crisis we were at 5%.

Help ! The Regie du Logement is Closed

Closure of the Regie and a halt to evictions, while understandable, has been trumpeted from the rooftops very loudly by both our provincial and federal politicians (thanks Justin and Francois!). This is a serious problem, because effectively there is no more stick with which to create consequences for non-payments, even as we may have doubts about whether tenants are using the crisis as an excuse.

What to do?

  •  For those tenants who have not reached out to make payment plans, we’re on a “business as usual” policy. The rental board might have halted hearings and evictions, but the Regie’s online services to open non-payment files are working. So are the bailiffs, so is Canada Post, and so are the email services that allow you to serve official notices. (Ever hear of Pronotif ? It’s an online service that allows you to serve notice by email). In effect, we’ve explained to our defaulting tenants that they’re just delaying the inevitable. When the rental board does reopen, judges (I predict) will not look kindly on those who simply stopped paying their rent with no explanations, and who refused to open a dialogue with their landlords.
  • Consequences, I predict, will be delayed rather than erased. Unless banks and the federal and provincials governments begin talking about mortgage forgiveness instead of delays, I don’t see how missing rent will simply be “forgiven” as we return to whatever the new normal becomes.

What About July 1st?

In Quebec, we have a fairly serious up-coming issue. The Guardian estimates that about 10% of Montrealers move every July 1st. (The rate is still high, but probably not quite as high in the rest of the province). In April, landlords and property managers in the province are usually renting their soon-to-be-vacant units, just as tenants are out visiting looking for their new homes. The covid crisis has thrown a serious wrench into things. Tenants (rightly) are leary of allowing strangers into their homes. The Real Estate Board (OACIQ) has officially ordered brokers to halt visits. Do rental visits constitute an essential service? Francois Legault has decided for the moment that no, they don’t.

What to do?

  • First, we contacted our non-renewing tenants to propose they extend their leases until September 1st. Basically, this takes the pressure off. We don’t have to show units and they don’t have to visit. Problem displaced if not solved.
  • Some landlords have begun renting with virtual visits. Personally I don’t like doing this. I’ve had problems with a high percentage (over 50%) of units rented this way in the past. Our agency has rented to international students and arriving immigrants based on Skype visits before. Very often, something about the unit displeases them very quickly and they agitate to break their leases.
  • Wait. For now, there may not be a need to panic. As our politicians eye re-opening segments of the economy in the coming weeks, we will have to see what edicts will come down for the 10% of Quebeccers who usually move in July. My guess is that Legault and co. are waiting to see if we can all go back to business as usual in the next month, which would moot the issue of freezing all moves in July.

Imperfect Action is Better than Perfect Inaction

So said Harry Truman. I’m inclined to agree. As time moves on, those who will weather this storm best are those who will act.  Better to be pro-active about where the cheese is now, rather than sitting around like a doe in the headlights watching the news.

My advice: read about past financial crises. Understand the dynamics of pandemics (click the link to see my favorite book on the topic, Spillover). Learn about past Real Estate- and stock cycles. Plan your actions carefully as a function of the data you have now. No one will make 100% perfect decisions at the moment. There is still too much we don’t know, and our mental- and economic models need to catch up. This will take time and more data.

A crisis is no time for perfectionism. It is time for considered action.

It is time to be our best selves right now, on a dark and uncertain day, because the day is dark and uncertain.

hand writing on blackboard

What’s The Number One Reason People Invest in Real Estate?

Or how is wanting properties like wanting a six-pack?

“I really want to make more money!”

This is often where conversations about investing start. Is this really the true reason why we want to invest?

Think about it this way. How many gym memberships are bought with the words: “I want a six pack for summer…” ?

Do we really want the six pack? Or are we after something else? Wouldn’t it be better to feel fit, healthy and confident when you wear that bikini or pair of board shorts to the beach?

My guess is it’s more about how we want to feel and less about the six pack itself. Maybe the six-pack is just shorthand, because we’re a bit too lazy to think about what will really make us content and confident in our skins.

Perhaps the gym membership is only part of the solution.

Why Invest in Real Estate?

Real estate investing isn’t that different.

Most of us start out thinking it’s all about the money. But what do we want more money for? When we really look at our motivations, we may find that we’re really after something else… something that will be better than a big bank balance.

To find out more, watch the first video in my five-part series on the basics of real estate investing…