How To Make A Smart Rental Investment During The Covid-19 Recession

Unless you like to gamble, investing wisely in real estate – and especially in rentals – means paying attention to the long-term financial returns of your property. And this in turn means paying attention to the economic health of the market where you choose to invest.

It’s pretty simple; you have a better chance for reliable returns where there is – and will be – good demand for housing. And that usually requires a growing local economy.

In the time of Covid-19, in 2020 and probably 2021 as well, that simple analysis logic is upended because almost every local economy is not growing. Furthermore, many kinds of jobs will be permanently lost as a result of the Covid-19 recession, which will affect some local economies more than others. This means that investors have a more complicated task; it boils down to playing defense, to focus on local markets that are most likely to produce good returns in the future because they’re least likely to suffer long-term harm.

How do we do that? The data we usually analyze, like jobs and unemployment, can be misleading right now; some states shut down their economy, others didn’t. Recent data on home prices and rents reflect transactions that were started many months ago, before Covid-19 was even a word; they’re not much of a guide for the future.

So let’s be strategic; let’s look at the underlying structure of local economies to see which are more fundamentally solid than others. Markets that were strong before Covid-19 should do well after Covid – with some exceptions.

We’ll start with demand for housing, measured by rising home prices the last few years. That’s a reliable measure for renters as well as homeowners. What we’re looking for is a consistent increase at a sustainable level. Ranking the 100 largest local markets, we get the Top 20 list in Table A. Phoenix might be on the high side for sustainability, but a consistent 5 to 6 percent annual increase shows solid demand.

Next, let’s see which local economies were doing well in the years before Covid*19, measured by job growth. Again, we’re looking for consistent growth, not boom economies. Ranking our 100 markets we get the list in Table B. There’s a wider range here, from more than 3 percent to just over 1 percent.

Austin, Phoenix, Bakersfield, San Antonio, Philadelphia, Knoxville and Richmond appear on both lists; Columbus, Atlanta, Houston and Fort Lauderdale almost.

These are eleven good choices for investors at this difficult time. Let’s just make sure they don’t have any major weaknesses.

Covid-19 will have a long-lasting effect on jobs in retail, restaurants, tourism and manufacturing as businesses in these industries redesign their operations to use fewer workers. In addition, the recession will severely damaged the financial health of hospitals, colleges and local governments, all of which will be forced to trim their workforce. These are Covid-19 vulnerable jobs. The list in Table C. shows what percent of the total jobs in each of our eleven markets are vulnerable.

Bakersfield (government), Knoxville (manufacturing) and Philadelphia (healthcare) have a higher but not alarming percent of such jobs. The average for the 100 largest markets is 10 percent.

Table C. also shows the size of current job losses; the US average is 9 percent. Even though current statistics are nothing to go by, we want to be sure there isn’t some unexplained breakdown.

Conclusions

Unless the pandemic continues unabated for several years and the real estate markets collapse, investing in rentals will be a good idea. There are a number favorable local markets for investors, even during this time.

The markets listed in Tables A. and B. are all candidates; those listed in Table C. are even stronger choices; and the eight markets with low Covid-19 vulnerable jobs give you the least to worry about: Atlanta, Austin, Columbus, Fort Lauderdale, Houston, Phoenix, Richmond and San Antonio.

There are no guarantees in real estate, in the end it comes down to your decision about a specific property; but a process of careful analysis can identify markets where the economic forces are on your side, not against you.

This post first appeared on Forbes.com. To see the original, click here.