People often joke about how to prepare for a zombie apocalypse. State Farm even has a tongue-in-cheek survival guide on its site, with list essentials such as chocolate pudding and a passport.
It wasn't too long ago that if you heard about "pandemic-proof real estate investments," you'd probably lump that in with the zombie apocalypse. But a pandemic is here, and it's changed the marketplace. Here are some real estate investment strategies to consider that might help your portfolio weather a pandemic.
Diversifying your portfolio is always a good idea to prevent risk. If you're trying to weather a pandemic, try to not be overinvested in one product class. Take malls and amusement parks, for example. In a pandemic with stay-at-home and social distancing orders, if you're only invested in places where people gather, you'll likely lose money.
The best defense against a pandemic or other disaster that could decimate a certain industry is to have real estate investments across the board: multifamily, warehouses, self-storage, single-family homes, and office buildings/co-working spaces, for example.
Diversification also applies to location. If one part of the country faces a natural disaster and you're heavily invested there, you could lose money. If you invest in properties across the country, you minimize risk from natural disasters that tend to be localized (floods, hurricanes, wildfires, etc.).
2. Avoid sectors prone to risk
Regarding commercial real estate, some sectors are more prone to risk during a pandemic, as we've seen during the current coronavirus pandemic. Vulnerable industries you might want to avoid for a pandemic-proof real estate investment strategy are senior housing and hospitality.
As for hospitality, the industry took its last recent hit after the recession of 2008. The popularity of Airbnb (NASDAQ: ABNB) also hurt hotels. Just as the business was starting to recover, COVID-19 travel restrictions happened, and hotels once again were hit hard.
Hotels are expensive to build, run on a mostly seasonal business model, and the volatility of the business makes it difficult for investors to count on returns. Even in good times, hospitality can be risky, so avoid this sector if your goal is to have a pandemic-proof investment strategy.
As for senior care facilities, the current coronavirus pandemic sent the industry reeling. Investors in healthcare real estate investment trusts (REITs) saw shares fall 50% at the start of the pandemic. Plus, senior care facilities are heavily regulated, meaning they could be shut down for an infraction, making this a risky investment to weather a pandemic.
3. Invest in places people want to be
Having an investment strategy that can weather a pandemic involves acting more like the tortoise than the hare: You want slow and steady, not fast and flashy. That means researching to invest in properties you can get for a good price, provide good cash flow, and look as if the area is up-and-coming and has enough infrastructure going for it to withstand a crisis.
During the coronavirus pandemic, for example, these secondary cities (populations under 500,000) fared better than big cities overall:
- Charlotte, North Carolina
- Austin, Texas
- Jacksonville, Florida
- Nashville, Tennessee
Because smaller cities are less densely populated, they reported fewer cases of coronavirus, since people could better socially distance there. That might prove important for possible future pandemics.
The Millionacres bottom line
When you want to be prepared for a pandemic regarding your real estate investing strategy, go back to basics. Shore up your existing holdings instead of investing in new ventures during times of great uncertainty. And consider consulting with real estate experts or asset managers. Both can help you develop your best strategy to help you preserve cash flow and position yourself to act when opportunities arise.