Investment property during Covid19

User Forum Topic
Submitted by bpnbpn on May 11, 2020 - 8:16pm

Team

We had put a deposit on a new property and it will be ready by end of next month. When we put the deposit, we didn’t anticipate coronavirus. Given the current state, I am not too sure whether it’s wise to invest in rental property at this time. Concerns include possible recession and its impact on house prices, and rent collection risk due to possible tenant losing job.

If I withdraw now, I will lose the earnest money (around 5000$). What do you suggest?

Submitted by Hobie on May 12, 2020 - 4:45am.

this:
"Governor Gavin Newsom today issued an executive order that authorizes local governments to halt evictions for renters and homeowners, slows foreclosures, and protects against utility shutoffs for Californians affected by COVID-19."

https://www.gov.ca.gov/2020/03/16/govern...

Agree, I would be wary of a new tenant who then plays the Covid card and you are stuck with no rental income and no means to evict.

Read up on Force Majeure in your contract.

Submitted by Coronita on May 12, 2020 - 4:57am.

if you don't mind me asking, where is the property? Is it here in SD or even in CA?

Submitted by zk on May 12, 2020 - 10:34am.

Man, that's a tough one.

$5,000 is a lot of money. But how many months rent is that? 2? 3? 1 1/2?

I don't know what the odds are that you'd have trouble finding tenants who can pay or that you'd get one who would seem ok but then lose their job or otherwise not be able to pay. But if one of those things does happen, it wouldn't take long for that to cost you 5K. And a whole lot more.

I guess I would try to find a way to figure out how likely one of those things is. Not sure how you'd go about that. Maybe ask other landlords in the same neighborhood or general area if you can find them.

Submitted by scaredyclassic on May 12, 2020 - 11:00am.

It's hard to eat a loss.

I'd consider the 5k as lost either way and just think independent of the 5k do I want to move forward.

Look at it this way. If you bail, and its relisted will the price be 5k less?

Submitted by Coronita on May 12, 2020 - 11:38am.

I'd venture over to craiglist and zillow lookup the zip code where your investment property is and figure out how much and how many properties are currently listed for rentals...

In fact, I'd try to make a fake craiglist or zillow post offering this house as a rental at the price you think you were originally going to rent it for to see how many people will respond. That will give you a reality check as to how much demand is softened near your particular sub market.

When I did this for one property near SDSU, the response rate was roughly 4 per week, and many had not so great credit score

When I did this for one property in mira mesa, the response rate was roughly 15 per day, where 3 out 4 had 700 or above credit scores. Hence, why I sold that condo near SDSU and did a 1031 exchange.

This probably matters even more during these times.

92126 still is a shitty market if you are looking for a 1/1 (and lesser extent 2/2) to live in. Very little inventory.

https://sandiego.craigslist.org/search/a...

92130, on the other hand, plenty of rentals available.

Carmel Valley, contrary to popular belief is not that great as a rental market versus say Mira Mesa.

Submitted by bpnbpn on May 12, 2020 - 11:44am.

Team,

Great questions and thanks for quick replies. I used piggington while I was shopping for house in 2012 and you all provided excellent help that helped me to make great decision during the down market.

Ok, here are more details, sorry I didn't provide it upfront.

1) This is a 2000 sqft independent house in Chandler Arizona
2) It's priced around 350K and we paid earnest money of 5,000$
3) I estimate the rent will be around 2100$ or so
4) Chandler has been a hot market, especially due to their outstanding schools. They are surely at the peak (this house would have costed 220K back in 2012/2013).
5) The builders are claiming that they are still seeing strong sales though I clearly witnessed that they moved from lottery system with multiple offers to tons of unsold units. so I wouldn't believe them fully.

I hope this helps. I know 5,000$ is a lot of money but I am very concerned about not able to receive the rent and/or the house price plummets right after we buy.

Please share your thoughts.

Submitted by bpnbpn on May 12, 2020 - 11:48am.

I'd venture over to craiglist and zillow lookup the zip code where your investment property is and figure out how much and how many properties are currently listed for rentals...

In fact, I'd try to make a fake craiglist or zillow post offering this house as a rental at the price you think you were originally going to rent it for to see how many people will respond. That will give you a reality check as to how much demand is softened near your particular sub market.

When I did this for one property near SDSU, the response rate was roughly 4 per week, and many had not so great credit score

When I did this for one property in mira mesa, the response rate was roughly 15 per day, where 3 out 4 had 700 or above credit scores. Hence, why I sold that condo near SDSU and did a 1031 exchange.

This probably matters even more during these times.

92126 still is a shitty market if you are looking for a 1/1 (and lesser extent 2/2) to live in. Very little inventory.

https://sandiego.craigslist.org/search/a...

92130, on the other hand, plenty of rentals available.

Carmel Valley, contrary to popular belief is not that great as a rental market versus say Mira Mesa.

Looks like an expert in this area! A lot to learn from you. This is a fantastic idea. I will keep this in mind.

BTW I do agree that 92130 is a very bad place for investment property. I did the math for cashflow and it looks like I will have -ve cashflow for at least 10 years in the future.

This kinda applies now to most of SD as well given how high our prices have gone. That's the reason I started looking into AZ.

Submitted by bpnbpn on May 12, 2020 - 11:49am.

scaredyclassic wrote:
It's hard to eat a loss.

I'd consider the 5k as lost either way and just think independent of the 5k do I want to move forward.

Look at it this way. If you bail, and its relisted will the price be 5k less?

I think it may not be 5K less immediately. I think it may stay in the same price. But again, you are right. I thought to myself. If I hadn't put the deposit for this house, would I be shopping right now? The answer is NO.

Submitted by scaredyclassic on May 12, 2020 - 12:08pm.

I've become better at accepting losses but Im Still bad. Someone told me a neat trick for not getting irritated at smaller screwups.

Set aside 1k for small failures.

When u get a parking tkt, dont get mad, say, ah of course. Here's one of this years screw ups I set money aside for.

It works.

Better than raving at a ticket.

Submitted by Coronita on May 12, 2020 - 12:42pm.

If the property is out of state, then I'd look into the tenant right laws. California is probably the worst case scenario for landlords. States like AZ are probably more landlord friendly. So all these concerns about tenants not paying you might be overblown for your respective locale where your property is. Even in CA, it's not really a free for all. At some point these people still have to pay you back... Besides, in CA, it's not just the temporary moratorium that one needs to worry about. It's also about all the other crazy laws they are trying to pass, like the ones sponsored by two SF assemblyman that wants to cut rent 25% across the board in CA. AB-828. https://californiaglobe.com/section-2/bi...

Most ridiculous thing ever.

Sadly, I know one of the guys sponsoring the bill. We went to same grade school. Phuck you Phil.

With Craiglist, you can play around with the price. Sometimes dropping the price by $100/month is the difference between getting +- 10 extra interests who contact you.

Zillow is trickier because you have to actually enter more details about the property and address but it's also more reliable as far as getting real tenants... (Craiglist has been getting more to be the wild wild west).. There's a way, however you can list a rental without providing an actually street number, only a street name. So that way, you can create a burner account to test the waters.... I do this all the time and price the actual rental appropriately based on the amount of response and quality of the responses.

92130 is what an area where I think a majority of the landlords are "accidental landlords"... They bought a house, outgrew it, and rather than selling it and buying real investment properties, they rent it out. Partly to gamble on the appreciation in 92130 and partly because they have more money than know what to do with it... The issue is that the tenant pool in 92130 tend to also be wealthier, so they typically don't stay as long in the rentals as elsewhere, from what I can tell. So a lot more homes to choose from. Though many stay vacant because again, i guess the owners can hold on to them that way.

Submitted by Hobie on May 12, 2020 - 12:31pm.

That's a good area. I'd say if you have the $ to keep it a while without relying on a monthly rent for the mortgage, I'd stay the course and buy it. If your cash flow is tight, well..

Submitted by outtamojo on May 12, 2020 - 12:42pm.

Just occurred to me this is the perfect time for scammers to move in and stay forever without paying any rent with all the moratoriums and such.

Submitted by Coronita on May 12, 2020 - 12:58pm.

outtamojo wrote:
Just occurred to me this is the perfect time for scammers to move in and stay forever without paying any rent with all the moratoriums and such.

Id ask for first month and last month rent and 1-2 month security deposit. That's probably a lot to ask for and settle somewhere in between. Some wrote me a $16000 check as a condition of moving in, and had to wait for the check to clear. If they can't come up with the money, that's a red flag.

Submitted by FlyerInHi on May 12, 2020 - 2:26pm.

With hindsight, would you have bought in 2007, 2008? In 2007, even 2008, the polyannas were saying to stay the course.

Scaredy asked the right question. How much would the same/similar house sell for in the foreseeable future?

Even if your tenants pay you, and you can afford to stay the course, tenants not paying other landlords will cause your portfolio to lose value. Why would you not look at the value of your real estate portfolio like you do stocks. You may not sell your stocks, but the monthly statement show you how much you have gained/lost. If you do an annual statement of net worth, the loss of real estate value would be reflected.

In a recession, landlords become desperate and lower deposits and give free months’ rent. large apartment complexes are already giving free month at the end of the lease.

Submitted by Coronita on May 12, 2020 - 3:33pm.

Key consideration again is the specific location rental property is located, not a one size fit all solution. I'm sure the rental markets in different parts of Arizona probably look different than different parts of California which look different from different parts of Nevada, depending on how deeply the industries were impacted by covid, which a heavy bias towards areas specifically impacted by a high concentration of tourism.

Completely different set of rental rules in Arizona. The only real test is to put a similar property on the market to see what sort of rent it could fetch and how many and quality of tenant pool. You might find someone interested in a pie-in-the-sky rent price, but if it's for someone with a 550 credit score, there's a high probability they wont pay soon. On the other hand, those odds go down significantly if that person is 700+. If the bulk of the interest is in the low credit/low income scoring range, then either you're pricing it to high or you're investing in area that's going to high a higher probability of problematic tenants....That's not to say people with high credit scores can't wig out on paying...That's possible too, but the probability is lower...Zillow makes this easy, because as part of people contacting you, they can fill out their credit score. Those that conveniently leave it blank have something to hide. Because those with higher credit scores like to mention it because they are looking for an edge over every other applicant, even the possibility of a lower priced rent for that better score.

Submitted by FlyerInHi on May 12, 2020 - 3:55pm.

You already said that you would not buy if you had not already paid the $5000 deposit.
Just tell the builder that you can’t buy because of COVID-19 and see what they say.

Or try to push Escrow out further to see if the builder drops prices on similar units.

If you think you can buy for $5000 less in the future, then you have your answer

Submitted by Coronita on May 12, 2020 - 5:27pm.

things probably aren't as bad in Arizona. Definitely not as bad is they would be in Nevada. Good thing OP decided Arizona.

Submitted by Coronita on May 12, 2020 - 9:37pm.

speaking of rental relief. Things are changing so quickly.
I forgot that many of the moratorium rules expire soon 5/15 including the moratorium on evictions. I suspect some will get suspended but at the same time here's an interesting idea being floated...

https://www.google.com/amp/s/www.mercury...

It's actually not a bad idea. Rental loss income tax credit for landlords due to covid. The tax credit could be used to offset income elsewhere and could be sold immediately for cash. Also, discounts for property tax and income tax early payments since the state is bleeding on cash...

In this case , folks eith streams of income could for instance use the loss of rent income as an offset for example on W2 income from a job. The caveat though is it still wouldn't do you good on federal taxes. interesting though. The good part would be it does require both tenant and landlord to prove economic hardship to qualify. But even so, looks like the state might be paying small time landlords
to stop the evictions and allow people to stay in return for a lot of state funded financial benefits....Awesome!

I can't believe some of the moratoriums already start to expire soon... time passes so fast

.No worries piggs. It's someone else's problem.thst will be paying....

Submitted by Hobie on May 13, 2020 - 5:19am.

My cynical side says not to expect any sort of tax break. Governor doesn't understand the magnitude of keeping the state closed and the resulting loss of tax revenue. Calif has to push tax increases and new fees to recoup some of it losses.

Submitted by bpnbpn on May 13, 2020 - 1:05pm.

Yep I saw the details on rent relief program. It's bit vague for the landlords. Not sure if the landlord also have to prove financial trouble to get the rent refunded. That will be bad as landlords who are still employed but will have a gap by losing the rental income. This is an unprecedented situation and very hard to predict what will happen.

AZ also coming up with similar program that will pay the landlords the rent but will have a cap based on the tenant's base income.

Submitted by The-Shoveler on May 13, 2020 - 2:36pm.

Hobie wrote:
My cynical side says not to expect any sort of tax break. Governor doesn't understand the magnitude of keeping the state closed and the resulting loss of tax revenue. Calif has to push tax increases and new fees to recoup some of it losses.

When they get done adding up all the tax revenue lost by the states, it will just dwarf all the stimulus so far by a large factor and it is still going up.

I think many states will seek BK.

It will be a very very large defect, unthinkably large, just mind blowing. Unlike the FED, the states cannot just conjure up money with a few strokes on a keyboard no matter how much Newsom wants to.

Submitted by scaredyclassic on May 14, 2020 - 7:07am.

The-Shoveler wrote:
Hobie wrote:
My cynical side says not to expect any sort of tax break. Governor doesn't understand the magnitude of keeping the state closed and the resulting loss of tax revenue. Calif has to push tax increases and new fees to recoup some of it losses.

When they get done adding up all the tax revenue lost by the states, it will just dwarf all the stimulus so far by a large factor and it is still going up.

I think many states will seek BK.

It will be a very very large defect, unthinkably large, just mind blowing. Unlike the FED, the states cannot just conjure up money with a few strokes on a keyboard no matter how much Newsom wants to.

What is the law by which states may declare bankruptcy?

Or I'd it more of a michael Scott move. He just shouts I DECLARE BANKRUPTCY. Later it must be explained to him that's legally insufficient.

https://youtu.be/C-m3RtoguAQ

Submitted by The-Shoveler on May 14, 2020 - 8:06am.

Well I guess we would just have to figure out what it means when they just start defaulting.

Or what a mostly volunteer fire department etc.. looks like or something.

I think this is why Buffett said he would never live in CA.

Submitted by scaredyclassic on May 14, 2020 - 8:43am.

The-Shoveler wrote:
Well I guess we would just have to figure out what it means when they just start defaulting.

Or what a mostly volunteer fire department etc.. looks like or something.

I think this is why Buffett said he would never live in CA.

Municipal finance will be tough.

I used to work in public finance. I remember when muni bonds were fairly safe.

Defaulting on all those bonds might free up some cash.

Cant remember what the security was tho. Repo a state park?

A lot were unsecured I think.

Man that was a lifetime ago. So much fine print

Submitted by Coronita on May 14, 2020 - 2:09pm.

Are you sure you really want to back out of an Arizona property?

https://finance.yahoo.com/news/tsmc-buil...

Seems like Arizona is in this administration's good graces and should benefit form any sort of pork that comes out of this administration. Seems like more jobs coming to Arizona.


"TSMC to Build Chip Plant in Arizona With Government Support"

(Bloomberg) -- Taiwan Semiconductor Manufacturing Co. is planning to build a multibillion-dollar chip plant in Arizona, a potential realignment of global trade designed to allay U.S. concerns over supply chain security.The Taiwanese company is negotiating a deal with the administration of President Donald Trump to manufacture semiconductors in the U.S. to create jobs and produce sensitive components domestically for national security reasons, according to people familiar with the situation. Talks have been progressing swiftly in recent days and an announcement could come as early as Friday, according to the people, who asked not to be identified because the deal is not public yet.

“We are now actively evaluating the U.S. fab plan,” TSMC Chairman Mark Liu said on a recent analyst conference call, referring to fabs, the industry term for chip factories. “There is a cost gap, which is hard to accept at this point. Of course, we have -- we are doing a lot of things to reduce that cost gap.”

TSMC is the largest and most advanced maker of chips for other companies. Its factories, which are primarily located in Taiwan, produce important components designed by Apple Inc. and most of the largest semiconductor companies, including Qualcomm Inc., Nvidia Corp., Advanced Micro Devices Inc. and China’s Huawei Technologies Co. That makes TSMC a crucial part of many electronic devices, such as smartphones, laptops and servers running the internet, and corporate and government computer networks.An agreement would call for TSMC to build a plant in Arizona by 2023, according to the people. It’s unclear what type of support the project will get from the federal government or the state of Arizona.

A cutting-edge fab is expensive to build. TSMC spent NT$500 billion ($17 billion) to build an advanced facility in the southern Taiwanese city of Tainan that will churn out components for new iPhones this year. It plans another $16 billion in capital spending this year.

If the federal government provides cash for a U.S. plant, it’ll mark a shift in policy and rhetoric from a Republican administration. Trump’s White House has rarely supported such direct industrial intervention, favoring market dynamics. However, emerging trends may be forcing a reconsideration. The U.S. government is already giving or lending billions of dollars to keep companies afloat in the midst of a pandemic-fueled recession. The crisis has also highlighted how vulnerable global supply chains are to such shocks.

Semiconductor companies have not really slowed down due to covid, at least not yet. And neither has their stock price...

https://finance.yahoo.com/quote/TSM
https://finance.yahoo.com/quote/AMD
https://finance.yahoo.com/quote/INTC
https://finance.yahoo.com/quote/AVGO
https://finance.yahoo.com/quote/NVDA
https://finance.yahoo.com/quote/QCOM

Semiconductors are critical to high tech supply chain. Asking a US company to build something from the ground up is not feasible (Intel is the only US company that still has a fab). However, getting Taiwan Semiconductor (who is #1) who is also a U.S. ally might actually work... Because TSM would have a vested interest to have a fab on US soil if it means skirting future import tariffs. And sensitive chips used for military and communications could be securely done here, instead of overseas. It could be a win for both US and Taiwan.

I'm biased. Maybe if you were talking about a rental property in Nevada, I would say hell no, back out. But seems like Arizona and Colorado...I don't know. The probably aren't getting hit as hard.

Submitted by FlyerInHi on May 14, 2020 - 3:27pm.

To the original poster, whatever you decide to so, please update us every so often in real estate prices In Chandler. It would be interesting to get a peak to trough snapshot in this recession.

Submitted by bpnbpn on May 14, 2020 - 5:27pm.

FlyerInHi wrote:
To the original poster, whatever you decide to so, please update us every so often in real estate prices In Chandler. It would be interesting to get a peak to trough snapshot in this recession.

Absolutely. We did send our intention to pull the offer and the builder confirmed that they won't be able to refund the earnest money. we haven't officially signed the cancellation notice yet. I plan to take few more days to finalize it.

AZ does look enticing to be honest. It's an affordable market unlike CA.

Submitted by bpnbpn on May 14, 2020 - 5:29pm.

Coronita wrote:
Are you sure you really want to back out of an Arizona property?

https://finance.yahoo.com/news/tsmc-buil...

Seems like Arizona is in this administration's good graces and should benefit form any sort of pork that comes out of this administration. Seems like more jobs coming to Arizona.


"TSMC to Build Chip Plant in Arizona With Government Support"

(Bloomberg) -- Taiwan Semiconductor Manufacturing Co. is planning to build a multibillion-dollar chip plant in Arizona, a potential realignment of global trade designed to allay U.S. concerns over supply chain security.The Taiwanese company is negotiating a deal with the administration of President Donald Trump to manufacture semiconductors in the U.S. to create jobs and produce sensitive components domestically for national security reasons, according to people familiar with the situation. Talks have been progressing swiftly in recent days and an announcement could come as early as Friday, according to the people, who asked not to be identified because the deal is not public yet.

“We are now actively evaluating the U.S. fab plan,” TSMC Chairman Mark Liu said on a recent analyst conference call, referring to fabs, the industry term for chip factories. “There is a cost gap, which is hard to accept at this point. Of course, we have -- we are doing a lot of things to reduce that cost gap.”

TSMC is the largest and most advanced maker of chips for other companies. Its factories, which are primarily located in Taiwan, produce important components designed by Apple Inc. and most of the largest semiconductor companies, including Qualcomm Inc., Nvidia Corp., Advanced Micro Devices Inc. and China’s Huawei Technologies Co. That makes TSMC a crucial part of many electronic devices, such as smartphones, laptops and servers running the internet, and corporate and government computer networks.An agreement would call for TSMC to build a plant in Arizona by 2023, according to the people. It’s unclear what type of support the project will get from the federal government or the state of Arizona.

A cutting-edge fab is expensive to build. TSMC spent NT$500 billion ($17 billion) to build an advanced facility in the southern Taiwanese city of Tainan that will churn out components for new iPhones this year. It plans another $16 billion in capital spending this year.

If the federal government provides cash for a U.S. plant, it’ll mark a shift in policy and rhetoric from a Republican administration. Trump’s White House has rarely supported such direct industrial intervention, favoring market dynamics. However, emerging trends may be forcing a reconsideration. The U.S. government is already giving or lending billions of dollars to keep companies afloat in the midst of a pandemic-fueled recession. The crisis has also highlighted how vulnerable global supply chains are to such shocks.

Semiconductor companies have not really slowed down due to covid, at least not yet. And neither has their stock price...

https://finance.yahoo.com/quote/TSM
https://finance.yahoo.com/quote/AMD
https://finance.yahoo.com/quote/INTC
https://finance.yahoo.com/quote/AVGO
https://finance.yahoo.com/quote/NVDA
https://finance.yahoo.com/quote/QCOM

Semiconductors are critical to high tech supply chain. Asking a US company to build something from the ground up is not feasible (Intel is the only US company that still has a fab). However, getting Taiwan Semiconductor (who is #1) who is also a U.S. ally might actually work... Because TSM would have a vested interest to have a fab on US soil if it means skirting future import tariffs. And sensitive chips used for military and communications could be securely done here, instead of overseas. It could be a win for both US and Taiwan.

I'm biased. Maybe if you were talking about a rental property in Nevada, I would say hell no, back out. But seems like Arizona and Colorado...I don't know. The probably aren't getting hit as hard.

You always bring in great data points. This is an interesting news. Let me think through this weekend. I fully get the point that the best time to buy is when there is blood on the street. I am not sure whether I am triggering too soon before there is a lot blood on the street.

Submitted by Coronita on May 14, 2020 - 7:26pm.

$12 billion Arizona plant

Confirmed. This is a big win.

I have a feeling Arizona and Colorado are going to be hotspots for the next areas of good and healthy job growth and migration from CA and Nevada.

https://finance.yahoo.com/news/tsmc-buil...

Submitted by bpnbpn on May 14, 2020 - 8:37pm.

You are right. It's a confirmed news. Great to see AZ getting this opportunity. BTW, I also saw this news:

https://www.abc15.com/news/region-phoeni...

Zoom is opening up an office in Phoenix area.

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