The real estate market has changed compared to what it was five years ago, but that mean we will be facing rough patches ahead — and likely a couple of years of slowdown. So how can you as an investor safeguard yourself against them?
Ways to Protect Yourself
Historically, real estate cycle rises and falls in an 18-year property cycle like clockwork according to Phil Anderson. Periods of recession appear and recede after approximately every 14 years of rise. Thus, it’s no surprise to encounter some economic issues now and the next few years. They may not be as dramatic as what happened in 1997, but reverberations have already been felt in the real estate market.
Luckily, there are a few ways you can protect yourself. All these start with thorough market research at the point of purchase to ensure success.
- Be realistic with cash flow numbers.
When purchasing a new property, it doesn’t do anyone any favours to plug in vague numbers to determine monthly cash flow. You should sit down at the computer, open a spreadsheet, and factor in all your expenses and costs. Be conservative and honest
When the market does eventually take a downturn and rental rates decrease, you’ll at least know that you have some play in your numbers. On the other hand, if you were liberal with your computations, you’ll find yourself underwater in very little time.
- Buy properties in renter catchment area
Buy properties in proven location with strong renter market. These properties can be easily rented to the masses that cannot afford to buy a house or apartment due to the ever rising property prices. These groups will generally remain a renter in good or bad times thus ensuring a steady occupancy rate and rental income.
- Be the best landlord possible.
It always pays to be a good person. When you’re a likeable landlord who works with people, deals with maintenance issues in a swift manner, and charges affordable rent and maintained the property well people are more likely to stick with you when the market turns.
On the contrary, if you’re a jerk and tenants are just renting from you because you were the only option at the time, they’re going to bolt the moment they can. Focus on building a strong reputation now so that you’re better equipped to survive a potential crash.
- Buy properties that rent below the median.
You have to think one step ahead of the market. While it’s a good rule of thumb to have the best property on the street, you don’t want to be stuck charging a rent that’s higher than the median in the area. This may be fine during times when the market is healthy, but you’ll get swallowed up when the market falters.
People still need a place to live in a down market, but they’re naturally going to gravitate towards what they can afford. By purchasing properties that rent below the median, you can maintain steady occupancy rates, regardless of what’s happening in the larger economy.
- Pay down mortgages when possible.
There’s always the question of whether it makes more sense to pay down on an existing mortgage or put that money into a new piece of real estate. Some may not opt for this as they prefer to leverage on the low interest rates. On the other hand, you may want to consider paying down rental property mortgages when you can. This gives you some leverage if the market crashes and you have difficulty making payments.
Never Put All of Your Eggs in the Same Basket
At the end of the day, financial diversification is your friend. Real estate may be one of the more stable and appreciation-friendly investments you can make, but don’t put everything you have into real estate. Spread yourself out a bit and diversify as much as possible. This mitigates your risk and provides more tolerance in a down market.
