Having been in the real estate game for about 15 years, I have been through city and state recessions and booms as well as the 2008 crash. Those were some tough times with some lessons learned.
Using history as our guide, we know that market cycles are inevitable. We know that before they happen, it’s important as a real estate investor to prepare and protect your portfolio against severe loss.
Smart investors understand that economic crashes are not only healthy, they are also windows of opportunity. Ask anyone that went in heavy at the height of the last crash and maximized their returns. To take full advantage, however, requires you to prepare for the crash. So here are some tips to prepare for the next market crash:
1) Know Your Market & Rent Rates: This is something you should know as a matter of course, but it becomes more important as we roll into an economic slowdown. Aside from being in tune with valuations in your market, you should be working with your management company that is knowledgeable about the rental market in the area. During a correction or crash, other landlords may drop their rent to maintain a higher occupancy. Tracking these changes becomes important from a competitive standpoint.
2) Cash Flow is King: If your property cash flows, meaning it brings in more income than expenses and the mortgage, then it doesn’t matter what happens to the value. If the value of the property drops during the crash, that won’t impact you unless you sell. In many markets, experienced investors buy properties that produce income and consider appreciation as icing on the cake, but it depends on your strategy and market.
3) Buy C-class or better: Real estate investors evaluate neighborhoods like grades in school. D-class properties typically have high-crime and high-vacancy rates; B-class properties host upper-middle-class people; A-class properties are typically high-end new development or the best locations in the city. A good C-class area is where you will find your average neighborhoods with plenty of renters. When you invest in C-class or better neighborhoods in economically diverse markets, you avoid the worst of the negative factors when a market turns, and you can ride out the storm.
4) Build a War Chest: When the market turns, you want to have a healthy, liquid cash reserve. When the crash hits, there will be many that did not prepare. So, there will be plenty of short sales and foreclosures at great deals. If you have cash in the bank and ready to deploy, a crash is the perfect opportunity for you to expand your portfolio quickly.
5) Invest in Diversified Economies: Don’t invest in markets where there is a single industry the city depends on for their livelihood. A diverse labor force is vital! Detroit is a very good example. When the auto industry failed, all the home values plummeted as people migrated out of Michigan to where the jobs went. Many rentals in the city and suburbs went vacant as did office and commercial space. To this day, many of these places still haven’t recovered. Instead, look at cities centered around hospitals or healthcare, education, distribution centers, and factories.
The market is going to crash again. Technically, history tells us we are already overdue based on the ten-year cycle. We don’t know if a crash will happen in the next 12-24 months, but if you follow these points, you will be able to expand your portfolio. Don’t wait to buy real estate. You buy real estate and wait.
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Thanks so much for watching and I’ll see you the next video. Be great.