Regardless of your level of experience in the housing market, navigating a crisis can be a challenging task. Moreover, implementing real estate investment strategies during a bear market is significantly more difficult as the pool of potential renters and buyers dwindles. As the coronavirus pandemic continues to ravage the globe, investors must hunker down and prepare for the worst-case scenarios. This might seem like an overreaction, but this is the safest way to avoid losing money in real estate and get ahead of a potential recession. In this article, we will discuss the steps that real estate investors and rental property owners should take to avoid significant financial loss during a crisis.
How to Avoid Losing Money During a Downturn
While a housing market crash is highly unlikely, any smart real estate investor should prepare for a financial crisis. Most observers predict an economic downturn whose effects will likely reverberate throughout a wide range of sectors, the housing market included. So how to avoid losing money in this uncertain climate? Here are some effective approaches that you should know about.
1- Don’t panic sell
Panic buying has been rife during the coronavirus pandemic. But it is important to note that panic selling is just as prevalent and equally harmful. In fact, it is not uncommon for certain real estate investors to panic the moment the value of their property starts to fall. This short-sighted reaction often results in losing out on a prime property that is still capable of generating positive cash flow. As long as your investment property is still earning rental income, there is no reason to offload it during a crisis.
2- Convert your Airbnb into a long term rental property
Short term rentals are the most affected types of rental properties during a crisis. While this is generally true in any type of economic downturn, the impact is especially significant during this pandemic given the lockdown measures that most states have imposed. Airbnb hosts across the US have experienced significant rental income loss and a short term rental strategy is simply not viable at the moment. So how to avoid losing money when owning rental properties of this type? The answer is simple; consider converting your Airbnb into a long term rental. Here is how you can pivot from one rental strategy to the other in a quick and safe manner:
- Check local tenant-landlord laws in your jurisdiction.
- Look at rental comps to determine the ideal rate that you should charge.
- Retain the services of an attorney in order to prepare a lease agreement that protects your rights and those of your new tenants.
Besides converting your income property into a traditional rental property, you also have the option of offering the home to healthcare and emergency workers. In fact, Airbnb is strongly encouraging hosts to do so. Moreover, the company has decided to waive all fees for hosts who accommodate healthcare workers and first responders. Hosts can simply offer their space through a dedicated section on the Airbnb platform.
3- Cut your expenses
Like we mentioned earlier, one of the most effective ways to avoid losing money on real estate during a crisis is to prepare for the worst-case scenario. This is why you need to take a conservative approach when estimating your expenses. Operate on the assumption that the crisis will last a couple of months longer than what most experts are predicting and see if the expenses of your rental property business are still manageable throughout that period. If the answer is no, then you should consider cutting some costs. The first step you can take is to reduce your utility bills by installing a programmable thermostat. This is particularly important if you want to avoid losing money in multifamily real estate investing. Also, make sure to talk to your lender and negotiate a mortgage payment pause.
4- Work with a flexible real estate agent
The surest way to lose money when investing in real estate during a crisis is working with an agent who is unable to navigate rough waters. In fact, the current pandemic has already forced thousands of agents to adapt to new methods and approaches to the housing market. For example, many savvy real estate agents have started offering virtual open house tours to potential clients. Others have found creative ways to use drop-offs and wire transfers when handling contracts and deal closings. Needless to say, these are the type of agents that you should work with if you are planning to buy an investment property during a crisis. Their adaptability and willingness to wade through difficulties will be crucial to helping you avoid losing money.
5- Consider short term private financing
If you find yourself in a situation where your real estate business is severely affected by rental income loss, you can always seek out a private loan to cover your expenses. There is a myriad of lenders who are willing to offer short term financing solutions to investors and rental property owners who are going through a downturn. These loan providers understand that the situation is only temporary and that the underlying assets are likely to recover quickly.
6- Be prepared to make some concessions to your tenants
As you surely know, both the tenant and the landlord are affected by a crisis. This is why you must take the financial situation of the renter into consideration when you are trying to avoid losing money. If you refuse to renegotiate the lease, you might end up with a vacancy at a time when the pool of potential tenants is small. Try to find a middle ground with your tenant and settle on a rate or a rent deferral plan that is fair for both parties.
The Bottom Line
Losing money during a crisis is not an inevitability. In fact, it is easily avoidable if you properly prepare for it. Implementing the strategies outlined in this article should help get you there. In the meantime, sign up for Mashvisor to stay up to date on how the real estate market is behaving at the moment.