Key Takeaways
- Counter-cyclical opportunities arise from transaction friction and fear, not necessarily from fundamental value deterioration.
- Local portfolio lenders (credit unions) often continue lending when national lenders freeze.
- Thorough due diligence on tenant stability (payment history, employment) mitigates the risk of moratorium-related non-payment.
- A 14% discount ($840K vs. $980K) produced 31% cash-on-cash returns as the market recovered within 14 months.
The COVID-19 pandemic created a brief but intense window of opportunity for prepared investors. While most market participants froze—uncertain about the virus, eviction moratoriums, and economic trajectory—counter-cyclical investors identified and acquired properties at significant discounts. This case study follows a practical counter-cyclical acquisition executed during the pandemic disruption.
Identifying the Opportunity (April 2020)
In April 2020, an investor with $250,000 in cash reserves and a stable 6-property portfolio identified a 12-unit apartment building listed for $840,000 in a mid-size Midwest market. Pre-COVID comparable sales supported a value of $960,000-$1,000,000. The seller was a retiring landlord who had listed the property in February 2020 at $980,000. Two purchase contracts had fallen through in March when buyers lost financing or developed cold feet. The seller reduced the price to $840,000 and needed to close quickly—he was relocating out of state. Occupancy was 83% (10 of 12 units occupied), which was normal for the property, and 9 of 10 tenants were current on rent.
Overcoming Execution Challenges
The investor faced three challenges common to counter-cyclical acquisitions. First, financing was tight: the investor's primary lender had paused all new originations. Solution: contacted four portfolio lenders (local credit unions), one of which was willing to lend at 70% LTV with a 0.5% rate premium. Second, physical inspection was complicated by social distancing: the inspector required all units be vacant during inspection. Solution: coordinated a staggered inspection schedule over two days, with tenants temporarily leaving their units. Third, uncertainty about the eviction moratorium created risk: if existing tenants stopped paying, the investor could not evict. Solution: reviewed tenant payment histories (all tenants had paid consistently for 18+ months), verified tenant employment (8 of 10 employed in essential industries), and budgeted a 20% vacancy reserve into the underwriting to absorb potential non-payment.
Outcome and Return Analysis
The investor closed at $840,000 with 30% down ($252,000) and a $588,000 loan at 5.25% fixed. By mid-2021, comparable sales in the submarket had recovered to $1,050,000-$1,100,000 (above pre-COVID levels due to low interest rates and migration patterns). The investor had gained approximately $200,000 in equity appreciation within 14 months. Operationally, one tenant vacated during the moratorium period (voluntarily, no eviction needed), and all remaining tenants paid consistently. Annual NOI stabilized at $78,000, producing a 31% cash-on-cash return on the $252,000 down payment. The key insight: the discount was driven entirely by fear and transaction friction—not by any fundamental change in the property's income-producing capacity.
Key Takeaways
- ✓Counter-cyclical opportunities arise from transaction friction and fear, not necessarily from fundamental value deterioration.
- ✓Local portfolio lenders (credit unions) often continue lending when national lenders freeze.
- ✓Thorough due diligence on tenant stability (payment history, employment) mitigates the risk of moratorium-related non-payment.
- ✓A 14% discount ($840K vs. $980K) produced 31% cash-on-cash returns as the market recovered within 14 months.
Sources
Common Mistakes to Avoid
Avoiding all acquisitions during market disruptions out of fear
Consequence: Missing counter-cyclical opportunities that generate outsized returns; the best acquisition pricing occurs during the periods of greatest fear
Correction: Evaluate each opportunity on its fundamentals; if the discount is driven by market fear rather than property problems, proceed with thorough due diligence
Underestimating the importance of tenant quality analysis when acquiring during a disruption
Consequence: Acquiring a property with tenants who are unable or unwilling to pay rent eliminates the income advantage of a discounted purchase price
Correction: Review each tenant's payment history, employment stability, and lease terms individually before closing on a distressed acquisition
Test Your Knowledge
1.What was the key insight about why the property was available at a 14% discount during COVID-19?
2.What type of lender continued originating loans during the COVID disruption when national lenders froze?
3.What cash-on-cash return did the counter-cyclical acquisition generate?