By Guest Blogger, Peter Koulizos, property lecturer and author
www.thepropertyprofessor.com.au
Watch Rich Harvey's video of What Should Property Investors Do During Covid-19
To put it mildly, these are very interesting times. The COVID-19 crisis has presented us with some scenarios that most of us have never experienced. Huge government handouts, unemployment will increase very rapidly and markedly, property prices and rents will be negatively affected, tenants are having trouble paying rent and a nationwide ban on evicting tenants who don’t pay their rent due to the COVID-19 crisis.
What is a property investor to do?
When it comes to buying or selling property, there are basically three options:
a) Panic Sell
b) Buy more
c) Do nothing
Let’s look deeper at the three options.
a) Panic Sell
This is the worst of the three options. A number of initiatives have been put in place to help prevent property owners from panic selling. Firstly, the Federal government has announced a JobKeeper payment of $1,500 per fortnight which will go a long way to helping everyone, including tenants, meet their daily basic needs such as food, clothing and shelter. Secondly, banks are allowing mortgage holders an opportunity to stop making their mortgage repayments for up to six months. This will be a huge help to those property owners whose mortgage repayments are a significant component of their expenses.
Some investors may feel that they want to panic sell but with these initiatives in place, there is no need to panic sell.
b) Buy more
Even though panic selling in my opinion is definitely the wrong thing to do, there is no right or wrong answer in regards to whether you should buy more property or not. There will be some people who are cashed up, are secure in their employment and are not so risk adverse and will be inclined to buy more property during this COVID-19 crisis. The key factor here is their level of risk aversion. Money is cheap so it is a no brainer to borrow money and purchase real estate as some properties will be selling well below market value due to panic selling. However, what risks are they taking by buying now? The main issue is that property is an illiquid asset i.e. you can’t sell it quickly if you need to. This COVID-19 crisis has reinforced a number of lessons to me and one of the most important is that “cash is king”. It doesn’t matter how much you have invested in bricks and mortar, it is the cash flow that will get you through this crisis. Having good cash buffers in place by refinancing is a very sensible strategy. In my personal opinion, I would keep my cash close and get prepared with finance approval and look out for new opportunities in the coming months.
C) Do nothing
Similar to b), there is no right or wrong answer here; it depends on your appetite for risk. Doing nothing doesn’t mean that you have your head in the sand and don’t take notice of what is happening around you but the safest option at the moment is to get prepared for things returning to normal.
I definitely won’t be panic selling. I probably won’t be buying anything during this crisis but what I will be doing is keeping my eyes open, taking note of what creditworthy and trustworthy people are saying and then when I feel that the economy and property market has bottomed out and very importantly consumer confidence is rising, that’s when I would take action and buy.
What about renters? How do you deal with tenants asking for rent reductions?
Landlords and tenants need to communicate with each other. If there is a property manager involved, ask them to keep you in the loop. All parties should check whatever guidelines and legislation is relevant for their state and territory so that any solution that is agreed upon does not contravene these guidelines or rules. In addition, landlords should check their landlord insurance policies to ensure that whatever is decided upon does not disqualify them from claiming on the insurance policy in regards to loss of rent. Tenants also need to check with tenant advocacy groups so as to get some advice.
In these tough times employers/employees, suppliers/business and landlords/tenants will take a hit. Rather than just focusing on contractual obligations, both parties also need to consider what the right thing to do is morally/ethically.
As I stated at the beginning, most of us have never personally encountered a situation like this. I, like many of you, lived through the Global Financial Crisis (GFC). That wasn’t a big deal for Australia. I lived through the recession of the 1990’s – it was tough but we came through it. I have listened to stories from my parents as to life during World War 2. As horrific as these stories were, it did not last forever.
This COVID-19 crisis will also pass. In relation to property, it won’t take too long for property to rebound because unlike the GFC and the recession which were caused by financial and economic woes, this has been caused by a health crisis. Once COVID-19 is under control, then the economy will start to get back to normal, as will the property market.
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