The only thing that is constant is change. –Heraclitus
Since World War 2, this country has experienced 12 recessions, and almost as many housing downturns in the past 75 years. The cause of any particular recession may be different than the last downturn, but they all have one thing in common: They are actually pretty common. When one of them happens, the overall equity value of houses typically drops, then later a recovery occurs—often with higher cost inflation. As a result, houses have proved to be a good pretty hedge against inflation over the long haul, with an extra added bonus: you can live in the property, if you are a regular homeowner.
Real estate investors (REIers) are also affected by downturns, just like regular homeowners: renters may stop paying rent, or they move out unexpectedly creating a vacancy which may be hard to fill when a lot of people are out of work. That is where many landlords find themselves today: With tens of millions thrown out of work since early 2020 due to CV-19, REIers are having to adjust to some new economic realities. Specialty REIers, such as rehabbers, who are involved in fix/flip scenarios or adding granny flats (ADUs) to properties or maybe engaged in new development construction are experiencing a new and/or different set of challenges these days.
The Covid (CV-19) crisis has caused funding delays for many flippers. Construction loans that were relatively easy to come by in 2019 are now more difficult to obtain, may take longer to get approved and may cost more than before. Lenders are still proceeding, but with extra caution. And who can blame them? For those who were involved in the REI market in 2008-2012, you no doubt remember how equity values dropped precipitously, then started their march back up again. A lot of loans went to non-performing status back then. Many banks & hard money lenders lost money when borrowers failed to pay back loans.
Suggestions: If you are experiencing difficulties getting the funding you need, reach out to more resources: contact additional local and out of town lenders; consider taking on an equity partner or do a joint venture.
Price of materials (lumber, copper, diesel fuel) have skyrocketed in some markets
National media has had stories lately about inflation rearing its ugly head again. Increases in construction-related commodities affects the building trades like everyone else. For example, a recent news story reported that the price for lumber alone, for an average new home, has gone up by about $15,000. This has been caused by CV-related layoffs at sawmills creating a shortage of building-grade wood. Other commodities have gone up as well. This is causing a ripple effect across the country. The result are higher prices to everyone for many needed products and services.
Suggestions: Consider using alternate construction materials such as steel vs. wood where appropriate; try to recycle more of the “old” wood on rehab jobs vs. all new wood; buy good recycled wood from others. Go out for bids to 3 suppliers on big purchases of all commodities; positive results are often the outcome.
Backorder times have increased appliances, kitchen cabinets, etc.
Suggestions: Order these essentials earlier than normal in your purchasing cycle. Aggressively shop for more competitive time frames and prices outside your normal vendor circle. For example, do a Google search for vendors in close by cities or states to see how they might be able to help. Be ready to change appliance brands if your favorite one is unavailable or the prices have risen too much.
Quality subcontractor shortage
In some parts of the country, this is a serious problem. Subs are an important part of virtually all construction jobs.
Suggestions: Consider raising your pay scale, especially if you discover that you are paying less than the competition. Reach out to appropriate trade schools to recruit recent graduates. Consider taking on talented but unskilled workers and let them apprentice with you. Advertise in other cities via craigslist ads. Offer to pay for them to move, if they possess a highly valuable level of skills sets. Ask your current subs for contacts they have in the trades; many guys know guys who know guys. Offer a signing bonus.
City permit departments closing, reducing hours or switching to online processing
Hopefully when the CV-19 crisis has passed, the city fathers will see fit to resume business as usual with normal hours, in person, etc.
Suggestions: For those cities that are causing you very serious problems, consider shifting your marketing and sales emphasis to other nearby cities and counties that are more flipper-friendly.
What We Do: Quickly provide short-term, first position, private capital (WPFF) funding, to real estate wholesalers, among others. Contact info: Tod Snodgrass, firstname.lastname@example.org, 310-408-7015