The real estate market is cyclical and full of upswings and downturns, given it is far from static and in continuous fluctuations as per the ever changing general economic and specific market conditions. If the economy is sunny side up, it will reflect positively in the housng market, and vise versa. Surviving a real estate market downturn is no walk in the park for , but investors can strategize to protect their real estate business from such hard times and mitigate their potential losses. Fret not, here we give you the best tips to survive a real estate market downturn and to hedge your business against market fluctuations.
8 Tips to Survive a Real Estate Market Downturn
1. Don’t sell
Never make an investment decision out of mere emotion and fear. In a real estate market downturn, there will always be uncertainty and property values will plummet, but with this said, it is never wise to sell during a market crash because it will hurt your profit potential down the road. The best advice we can give you is to wait until the housing market is looking up before you decide to sell your property, a real estate market will always recuperate and reach equilibrium. What goes up must come down and vise versa. Also, make sure to have extra cash saved up to pay off your debts during hard economic times. If you have extra cash reserves, you will not feel pressured to sell your investment property.
2. Run real estate investing like a business
In real estate investing, there are ups and downs just like in any other business; businesses which stay afloat have better financial resources to mitigate the risk. During a real estate market downturn, real estate investment businesses which are equipped financially are at better odds of surviving market crashes and avoid bankruptcy. If you want to succeed in real estate investing, you must learn to budget for downturns and hard times to stay afloat.
- Have an emergency fund. You need cash saved to pay off any potential losses and debt.
- Have an emergency fund to keep you afloat for at least one year.
- Conduct cost benefit analysis to keep your expenses in check
3. Take advantage of tax benefits
One the many perks of real estate investing is the tax advantages and thus money saved from your business. Real estate investors will always have these tax advantages irrespective of the conditions of the current housing market. This means that you can write off business-related expenses during a real estate market downturn. As long as you are making money in the long run, you should be OK with experiencing a small hiccup in your financial returns during slow periods.
4. Mitigate vacancy risk
Remember, people still need a place to live during a real estate market downturn, but they will most likely look for reasonable rent and affordable accommodation. To stay on the safe side, especially during market crashes, buy rental properties with rent below the median. In this way you can maintain steady occupancy rates throughout the year, irrespective of economic fluctuations and potential risk.
5. Keep your tenants happy
This one needs little explaining, but the way you treat your tenants can make or break your real estate investments business. During a real estate market downturn, landlords are in a dire need to keep occupancy rates high and tenants happy. Without your tenants, you will end up paying off mortgage payments, property taxes, and insurance payments out of your own pocket. This can really hurt your real estate investing business and even tarnish your credit score, if you cannot commit to paying the mortgage payments on time. Long story short, be the best landlord to your tenants.
6. Be realistic with cash flow numbers
Before you decide to buy a rental property, make sure you conduct the right cost analysis and estimations regarding your inbound and outbound cash flow. Conduct diligent real estate market analysis as well as investment property analysis. It is never wise to buy a rental property without factoring in your potential monthly expenses. A general rule of thumb: always underestimate your rental income and overestimate your expenses. In this way when the market falters, you are better equipped to mitigate your losses and anticipate potential expenses.
On a side note, Mashvisor’s property calculator estimates real estate investors’ cash flow as well as cap rate and cash on cash return taking into account all the costs and expenses related to a specific investment property in order to determine whether or not the real estate property is worth the investment. Mashvisor’s investment property calculator cuts real estate investors’ time in half to find positive cash flow properties in a matter of minutes.
7. Pay down mortgages when possible
Rule of thumb: if you can afford to pay off your mortgage payments sooner, do it without hesitation. Paying off mortgage payments gives real estate investors more leverage during a real estate market downturn and in turn, it mitigates their default risk.
8. Diversify your real estate investment and never put all your eggs in one basket
Diversification is every investor’s friend. Why? Simply put, investment portfolio diversification means distributing your wealth across different investment strategies to manage your risk in the long term. Real estate is definitely less risky than, let’s stay, the stock market, but nevertheless, it doesn’t hurt to distribute your wealth across different real estate investments as opposed to putting all your eggs in one basket. In a nutshell, financial diversification is your very good friend, especially during a real estate market downturn.
In times of a downturn and recession, most businesses fight to beat the losses from their cash reserves and stay afloat. Real estate is a business, and real estate investors should treat it as such: have an emergency plan in case the housing market swings in the wrong direction and eats into your profits. Be proactive and always have cash reserves as a ‘just in case’ precaution. The real estate market is cyclical, and real estate investors will inevitably experience periods of upswing and downturns; the trick is to mitigate your losses and be proactive in facing a real estate market downturn. Better safe than sorry!
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