Since the 2008 Great Recession that was primarily caused by the housing market crash, the economy has been expanding at a high rate. In the following years, property owners have enjoyed consistent growth in house prices. However, just a few months into 2020, the coronavirus pandemic is already weighing heavily on the economy and some experts believe that the current real estate market trends are indicative of a real estate downturn.
Over the last several weeks, the spread of COVID-19 has affected different economic sectors, including the real estate industry. As a real estate investor, every time you turn on the news, you can’t help but be worried about the possible impact of this pandemic on your business. A real estate market downturn seems inevitable in many areas across the US. In fact, many real estate investors believe that a real estate market downturn is just around the corner.
With that said, this is the right time to prepare for another downturn in the real estate market. Preparation is the best defense against the next housing market downturn if it does happen. Here are some of our top tips on how to recession-proof your real estate investments and thrive in a real estate downturn:
6 Tips on How to Prepare for a Real Estate Downturn
1. Ensure Your Investment Properties Are in Tip-Top Condition
If you are concerned about the potential of a real estate downturn, one great technique for protecting your portfolio is to make your rental properties the nicest on the block. Invest in preventative maintenance, property repairs, and key upgrades. This will help improve the quality of your rental properties and ensure that they remain attractive to tenants seeking renewal. Tenant retention is key to surviving a housing market downturn. If your property is the best on the block, it’s likely that it will continue renting regardless of the real estate market trends.
Moreover, while putting off maintenance is commonplace as people try to balance their budget, it’s better to handle all maintenance issues now while capital is still relatively inexpensive and readily available. Just be sure that every penny is spent well. Don’t go for unnecessary upgrades and renovations during this time.
2. Get Rid of Risky Assets
Property owners should aim to dump any risky assets ahead of a real estate downturn. If you think that your investment property is not viable in the long term, consider selling it before the market takes a downturn. Make sure you can maintain the property and it can survive a significant dip.
Optimize your real estate portfolio by getting rid of rental properties that are not performing well and only keep those that are strong enough to weather the storm. With house prices still high, this can also be a great time to sell investment properties that have already appreciated significantly.
3. Hoard Cash and Build Sources of Liquid Funds
For most people, a recession is a dark time. People tend to lose their jobs, businesses, and homes. However, with the right preparation, you can thrive in a real estate downturn. Savvy investors who know how to buy real estate in a downturn understand that opportunities may appear during this time. In a down market, there’s usually a glut of properties available at discounted prices. Property sellers are usually in financial distress and are looking to sell as fast as possible.
One thing you can do to put yourself in a better position for the next real estate downturn is to have sufficient cash reserves and/or build other sources of liquid funds. Avoid spending cash unnecessarily and make sure you are not over-leveraged. If you are able to access cash easily, you will be able to move forward with buying an investment property. The more liquid funds you have, the more real estate you will be able to buy.
4. Develop Banking Relationships
This is also the time to develop multiple banking relationships in case you need to borrow money for future real estate investments. It’s best if you choose a local community bank or credit union that has a track record working with property investors. It’s easier to qualify for a loan with a bank you have had some deals with before.
Don’t forget to boost your credit score too if it’s not good. While mortgage rates are usually low during a recession, you should use this time to eliminate anything that would prevent you from refinancing a mortgage in the future.
5. Buy Cash Flow Properties
Another thing you should be doing now to prepare for a real estate downturn is investing in cash flow properties. Properties with positive cash flow are the best to own in a real estate market downturn. This is because they bring in money regardless of the changes in house value. Owning a rental property with negative cash flow during a real estate downturn can cause financial strain.
To make sure that you only buy income properties with positive cash flow, be sure to use the right tools in your property search and analysis. Mashvisor’s real estate investment tools allow you to search for and analyze properties for sale in the US housing market 2020 in a matter of minutes.
To learn more about our tools and how we will help you make faster and smarter real estate investment decisions, click here.
6. Negotiate Long-Term Leases
During a real estate downturn, vacancies tend to rise. One way to ensure that you generate steady cash flow is to have long-term tenants. Take note of financially stable tenants who would still be able to pay rent during a downturn and discuss an extension of their lease term or a lease renewal even before their lease ends.
The Bottom Line
Everyone started 2020 in high spirits and full of hope. But in just a few weeks, the COVID-19 global spread has affected home-selling activity and a real estate downturn seems like a possibility. However, the key to surviving a possible real estate downturn is to prepare for one. Now is the time to take advantage of the good times left and begin preparing for the next real estate downturn.
With the above strategies, current and aspiring real estate investors can make a real estate downturn plan that will ensure that they not only survive the period but also thrive. Without a good plan in place, you risk going out of business.