I love it when I hear people say, “this market will never go down” or “it’s different this time.” Like many, I’ve learned the hard way that it’s nearly impossible to time a real estate downturn. Up or down, there are always opportunities to make money. Unfortunately, as some have been predicting, it appears there may be another shift coming in the market. Interest rates are rising, inflation is at 50-year highs, and suddenly, we have unrest in Europe. None of these things are great for the economy as a whole. But at the end of the day, no one is 100% sure how much longer this bull market will continue.
I try to think of ways to ensure I’m as secure as possible in times like these. Then, if the market does have a pullback, even a massive one like 2008, I’ll be in the position to survive and thrive. Check out these four time-tested ways you can get yourself prepared for a real estate downturn:
Clean House
When the market is hot, it’s a great time to clean up your portfolio. If you have a bad tenant, evict them and find a new one. Sell off any poor-performing assets, rentals, notes, or projects that just aren’t working out the way you want. You can still get top dollar for them and use it for another project. Make sure you work on any projects you put on the back burner. Now is the time to turn them back into cash.
There is always a flight to quality in bad times
Looking at the market over the last 12 to 18 months, it is shocking how much complete junk is selling for. It seems like the worse the area or condition of the property is, the more it’s appreciated. The main reason is these less desirable properties are the most affordable currently. When the market finally turns around, remember quality will become a bigger priority. No one will want two-bedroom homes, properties in rough areas, or homes without a basement or a garage. Quality properties will become affordable again, and people will move to those, and the junky properties will get crushed.
Time is your enemy:
To protect yourself and your assets, concentrate on turning your properties over as quickly as you can. It shouldn’t take longer than six months to flip your average property from start to finish. If it takes you longer, you need to improve your process. Suppose you plan to buy a property and refi it as a rental. Secure your takeout financing now so that you can get these properties refinanced in 6 or no more than 12 months. This speed will allow you to increase your ROI and protect you from a real estate downturn.
Secure your capital:
Money is the lifeblood of the real estate business. When the market tightens up and you need money to finish or purchase new projects, it will probably be too late for you to find any capital. Get a HELOC on your house in case of emergencies. Finance your rentals for as long as a period as you can. Make sure you have a relationship with someone who has the capital to invest, even if you don’t need it now. Make sure they understand your business. Involve them in some deals so that they can make money now, and when the market flops, you’ll have a history with them of success.
The fact of the matter is markets go up and down. We can’t predict when they will change or for how long. But if we practice the four items I listed above, it won’t matter what the markets do. There is no need to be afraid of the next real estate downturn. You will make money in any market and live to fight thru the down ones.
We are always prepared for any market with asset-based loans. Let’s talk about how you or one of your clients can be better prepared for a shift in the market. Contact me by clicking here or call 248-385-3750.