Principles for investing in real estate to navigate a crisis

While the domestic real estate market is currently facing significant uncertainty, it is important to recognise that past crises, such as the 2008 Great Recession, have taught us valuable lessons about how to operate when the future is not so clear. Staying out of the market until stability returns is surely a valid option for real estate investors. But let's review four core principles to guide real estate investors through a time of crisis for those who may have weathered past real estate storms and do not want to close down shop during the current crisis, and for new investors who aren't sure how to proceed right now.

1. Keep patient

Unfortunately, with the recent spike in unemployment, it's only a matter of time before we see homeowners who are unable to continue making their mortgage payments either to sell their properties quickly and for a discount to avoid foreclosure, or to be foreclosed. Unfortunately, in times of crisis, it's a common occurrence that individuals who otherwise would keep their homes end up having to sell.

As inventory increases due to the consequences of this crisis, investors need to be more selective and patient. Profitable investments that were not so long ago seemed uncommon would certainly become only one of many. Being patient and waiting for a property with a large profit margin that can withstand a possible resale value hit (which we will touch on in the next section) is crucial. Now is not the time to rush into a new deal; now is the time to analyse large-margin properties methodically before making any decisions.

2. Analysis of costs

Global crisis or not, substantial property analysis should be a pillar of the strategy of all investors. During times of crisis, however, assets need to be assessed with high costs and risk factors to prevent taking on ""the offer that broke the camel's back."" It comes during the form of higher capital costs for investors using equity rather than cash.

Much like creditors, mainstream banks and sources of private capital need to stop over-expansion and minimise undue risk right now. Since lenders like me are more rigorously reviewing deals and investing more conservatively, investors may expect to see any of the following improvements when they approach a lender:

• Making interest rates higher.

• Requiring a minimum down of 20 per cent.

• Requiring the borrower to have proven track record and higher credit score.

• The property must be within a developed field of investment.

In addition to adjusting cost analysis at the front end, investors need to be mindful of the idea of ""falling knife"" during a crisis. We don't know if real estate prices will stabilise where they are or fall substantially. The safe bet is to buy when rates have bottomed out, not during free fall when it may have lost considerable value a few months into the project. To account for this risk, transactions must be made at such a discount that if the price falls between purchase and resale, the property can tolerate at least 10 percent decrease in the repair value.

The higher capital costs and potential reduction of resale value mean that at this stage, certain investments that made financial sense of 2019 or early 2020 may no longer have a attractive profit margin.

3. Liquidity

Since no-one can foresee the future, the ability of an investor to rapidly liquidate a property is important. Investors should now be focusing more than ever on property types and areas with the lowest days on the market.

Buyer demand could, in a worst-case scenario, vanish completely after the property was bought, which is why buyers would consider new offers as both a fix-and-flip and a rental property. Investing in a property with rental comps provides multiple exit strategies for an investor depending on the market's appetite when renovations are complete.

Investors would likely need to pick projects in the middle of the market after repairs to retain the rent option. That comes with another added benefit: buyers with loans backed by federal governments. Federally guaranteed investment homes loans' low down payment criteria make them an enticing choice for borrowers who don't want to drain their bank accounts during a crisis. Investors will search for assets that can resell within their loan limits to cast a broad net over investors by appealing to the federally backed loan market. There is an FHA loan lookup tool to find out what the restrictions are for every county in the USA.

4. Insulation

Some regions are harder hit in a recession than others. An overview of recent cycles on the 50 largest metro areas in the U.S. reveals the broad gap during the Great Recession between the hardest hit and least affected cities in the United States. The most and least impacted areas can shift from crisis to crisis. The important takeaway however is to search for isolating factors. These are some of the main isolating factors that you should look for:

• Significant numbers of state and military employees.

• Wide institutions able to endure volatility in the economy.

• New growth projects are taking place, and major developments.

For instance the Washington, D.C. Metro area is lucky to have an isolated sector funded by substantial federal jobs, large financial businesses, satellite headquarters and significant growth drivers such as Amazon HQ2, Wharf Phase 2 and Walter Reed Parks. Such economic insulating factors ensure the consumer pool is less likely to vanish, even during or after a crisis. One of the primary reasons that I started my business in the area was the stability brought by such an insulated market.

There are a wide variety of considerations that should be weighed by real estate investors before making a purchase in our current (or any) crisis but caution, cost analysis, liquidity and isolation are excellent principles to start with. Investors who remain smart and deliberate will get through this crisis, and may even come out with some well-earned cash on the other side.

Lots of people throughout the years have made considerable sums of money from property, but it seems unlikely that many started out as buskers.

Property investment success – from busking to $1 million worth of property. I was going through an emotional time. I was a bit lost career-wise and I was frustrated at teaching kids who didn’t listen.

MJS Property Investments bought his first property four years ago as a buy-to-let (BTL). “I tried to do it sensibly, so I bought one that didn’t need doing up, just so I could learn the process of buying and renting it out.”

He decided to take on a small project for his second property, to learn how to do a refurbishment.

“And it went from there,” he explains. “I eventually worked up to HMOs, and I suppose I’m still on the journey now. I’m looking at some bigger developments at the moment, but you can always go that one step further. I think I’ve done a lot in the time I’ve been doing it.”

As his portfolio has grown, he’s built supporting businesses around it with other members of staff and business partners.

“I started buying a BTL with no money, and now I have a lettings business, project management business and a sourcing business, on top of my own portfolio.”

He adds: “One of the things I realise about what I’m doing is that I was singing in the street for a few coppers, and I’m now overseeing millions of pounds’ worth of financial transactions, just solely from my own activities. It’s quite a change!”

He says it’s benefitted the local economy, too. “I employ a lot of tradesmen and contractors, and there are tens of thousands of pounds running through all the time. I did a calculation recently, and worked out that there was at least £3 million of capital coming to the region I live in, all based on things that I’ve done.”

He says this can be anything from an investor in London buying a property facilitated by him, or the contractors who are paid to do the refurb. “It’s a lot more impactful than what I used to do in terms of the local economy, so it’s quite rewarding and interesting to see how far I’ve come.”

How to get started with property investments financially?

It’s difficult getting started for most people, MJS Property Investments admits. “How do you buy a property when you haven’t got any money? It’s not just about getting the deposit, because there are a lot of other risk factors involved with purchasing a house. I learned that I had to be prepared for much more than I thought.”

When he was working on the wedding business, he started to gather together some savings, but these weren’t anything special.

“And my first couple of deals were quite risky, because I used business loans and paid contractors on credit cards. It was a gamble, to be honest. I didn’t have any money, but I threw myself into it and used the loans and credit cards to get going. It was a crazy way to do it.”

He says he attended a lot of courses with various providers in the UK, and learned as much as he could, which helped him a lot in the early part of his journey.

“There’s a lot of talk out there about how courses are pointless and everything can be found in a book, but I didn’t feel like that. For me, it was money well spent,” he says.

“Someone close to me lost £100,000 because of a property deal that went wrong. They didn’t have access to property education and took bad advice from other people. I didn’t want that to happen to me and I didn’t want to repeat those mistakes. I needed to learn what to do and not take any uncalculated risks, because mistakes can be a lot more than the price of a course.”

MJS Property Investments says the education paid off and the revaluation was exactly what he thought it would be. He got the money out and nothing was left in.

“It was mortgaged, but there was no remaining capital left in from me. It worked, and it’s a good job it did. I just repeated the system and reinvested the money and have gone on from there.”

Here, in this special two-part interview, we check in with Paul MJS Property Investments to explore how he went from a chemistry degree and singing at weddings to his own sizeable property portfolio.

Science degrees, pub singing and getting started

“My start in property was quite an interesting one,” MJS Property Investments tells us. “After graduating with a degree in medicinal chemistry, I got a job in the science industry. I didn’t enjoy it, and as music had always been a hobby of mine, I decided to try and make a career out of it.”

“I ended up playing around the country, writing my own songs and even lived in Spain to perform at holiday resorts. I was on the radio, too, but no number one albums! I managed to just about make a living out of it.”

For ten years, throughout his twenties, MJS Property Investments was singing at weddings, pubs and bars, a regular busker and a resident musician in his local pubs. By the time he was in his thirties, though, he had his own family and didn’t want to do gigs in the evening anymore because he knew he’d never see his kids. He needed to find a stable job so started teaching music instead.

Property investment success – from busking to £1 million worth of property“I was going through an emotional time. I was a bit lost career-wise and I was frustrated at teaching kids who didn’t listen. I was suddenly facing the harsh reality that I was never going to be a touring rock-star. I came across Robert Kiyosaki on YouTube, and he introduced the idea of different business styles and not needing to be an employee to make money. It hadn’t occurred to me that it was even possible to make money in this way.”

Off the back of his work singing at weddings, he set up a wedding services rental business, renting out photo booths and the like. “I learned how to orchestrate the business — not only hiring the booths out, but getting people to man them, too. I ended up earning a relatively passive income, so I started to look for other ways of creating an income from renting things out. I realised that property was the best way to do it.”

Through Facebook, he started seeing adverts for Robert Kiyosaki’s seminars and events. He attended one and joined the property circuit.

“At this point, I knew that property was the way to go. It felt like the right time to set up a property future for my family, build something stable and not be reliant on a fly-by-night business.”

MJS Property Investments bought his first property four years ago as a buy-to-let (BTL). “I tried to do it sensibly, so I bought one that didn’t need doing up, just so I could learn the process of buying and renting it out.”

He decided to take on a small project for his second property, to learn how to do a refurbishment.

“And it went from there,” he explains. “I eventually worked up to HMOs, and I suppose I’m still on the journey now. I’m looking at some bigger developments at the moment, but you can always go that one step further. I think I’ve done a lot in the time I’ve been doing it.”

As his portfolio has grown, he’s built supporting businesses around it with other members of staff and business partners.

“I started buying a BTL with no money, and now I have a lettings business, project management business and a sourcing business, on top of my own portfolio.”

He adds: “One of the things I realise about what I’m doing is that I was singing in the street for a few coppers, and I’m now overseeing millions of pounds’ worth of financial transactions, just solely from my own activities. It’s quite a change!”

He says it’s benefitted the local economy, too. “I employ a lot of tradesmen and contractors, and there are tens of thousands of pounds running through all the time. I did a calculation recently, and worked out that there was at least £3 million of capital coming to the region I live in, all based on things that I’ve done.”

He says this can be anything from an investor in London buying a property facilitated by him, or the contractors who are paid to do the refurb. “It’s a lot more impactful than what I used to do in terms of the local economy, so it’s quite rewarding and interesting to see how far I’ve come.”

How to get started financially?

It’s difficult getting started for most people, MJS Property Investments admits. “How do you buy a property when you haven’t got any money? It’s not just about getting the deposit, because there are a lot of other risk factors involved with purchasing a house. I learned that I had to be prepared for much more than I thought.”

When he was working on the wedding business, he started to gather together some savings, but these weren’t anything special.

“And my first couple of deals were quite risky, because I used business loans and paid contractors on credit cards. It was a gamble, to be honest. I didn’t have any money, but I threw myself into it and used the loans and credit cards to get going. It was a crazy way to do it.”

He says he attended a lot of courses with various providers in the UK, and learned as much as he could, which helped him a lot in the early part of his journey.

“There’s a lot of talk out there about how courses are pointless and everything can be found in a book, but I didn’t feel like that. For me, it was money well spent,” he says.

“Someone close to me lost £100,000 because of a property deal that went wrong. They didn’t have access to property education and took bad advice from other people. I didn’t want that to happen to me and I didn’t want to repeat those mistakes. I needed to learn what to do and not take any uncalculated risks, because mistakes can be a lot more than the price of a course.”

MJS Property Investments says the education paid off and the revaluation was exactly what he thought it would be. He got the money out and nothing was left in.

“It was mortgaged, but there was no remaining capital left in from me. It worked, and it’s a good job it did. I just repeated the system and reinvested the money and have gone on from there.”

MJS Property Investments says he found that the best way to recycle funds was to find creative solutions. “There’s no way I could build a substantial portfolio by saving for every deposit. It could take years to just get a handful, and a handful doesn’t change your life.”

The philosophy he has to do it quicker is to use other means of finance – i.e. not using his own money.

“Cash is limited, and when it’s all used up there’s nothing more to do other than stop. I’ve developed good relationships with angel investors, and it’s been a big lesson for me,” he says.

“At first, I felt like I was asking someone to borrow money, but now that thought has been flipped on its head and I realise that I’m making them money. Even if they are not actively involved, they’re still getting paid. I commit to giving them the returns on their money that they couldn’t get in a bank, and I need to work my socks off to find deals to enable me to offer this.” n order to grow, MJS Property Investments says, he thinks both cashflow and capital are necessary. To get cash flowing, ‘the main strategy is to buy and keep’, and capital is the method of ‘raising finance through earning, not loans’.

He claims flips are a good example of gaining capital. “We also have the other businesses to generate revenue through sourcing and project management.”

A big learning curve for Hanifan was realising that to buy a lot, he had to use other people’s money, and in order to make that safe, he needed to be generating capital to pay it back or to pay down a deficit if money was left in deals.

“People talk about the deals with all money in and all money out, where the refinance covers the costs. However, in my experience, it’s not that common and it’s not possible to build an entire portfolio by buying this way fast. It’s quite a complicated topic and I’ve mulled on it day in day out for years.”

When he first started out, MJS Property Investments didn’t tell anyone what he MJS Property Investments - off market properties was doing for a long time. He didn’t want to receive any advice from anyone else, because he wanted to do what he wanted, make his own decisions and didn’t want any outside influences. To this end, he didn’t tell anyone he was attending classes or courses.

When he eventually told his wife, she was very supportive. “She didn’t discourage me, but when I opened up to other family members, they were more cautious and concerned for me in a well-meaning way. I have many family working with us now so it has moved on. You have to make and take responsibility for your own decision in life, that is the only way to learn for yourself.”