Real estate is a very capital-intensive industry. In down markets, financing can be a lot tougher to come by as lenders scale back to cut losses. But recessions are filled with opportunities to make a handsome profit if you are prepared for them.
Here are a few tips for staying well equipped even when economic times are poor:
Stay Liquid
Cash is king in a recession. You’ll find that your purchasing power may increase quite a bit if prices drop.
If all of your cash is locked up in longer term investments, you will be unable to react to a significant drop in prices in the market.
This does not mean that you should back out of deals that you are already in. What it does mean is that you should consider holding off on starting newer projects or you should try to stay in shorter term investments like bonds and CDs so that you can get your cash out quickly. Regardless, keeping cash ready to cover your own expenses in the event that everything goes south is a necessity.
If you find that your deals are doing alright, even in the rough market, then you can start getting aggressive again. But you cannot get aggressive without capital ready to go. Hence the reason you should consider staying as liquid as possible to make the most out of a down market.
Take Out Debt Earlier Rather Than Later
Creditors often become more conservative in down markets as they wait for prices to stabilize. Regulations can also tighten like they did following the 2008 crash. It is highly unlikely that taking out debt will be any easier in a recession.
One great way to stay well equipped during a recession is to take out a home-equity-line-of-credit (HELOC) or other line of credit on your property before the market drops. Having a line of credit available can help you to stay liquid through rough times. It also allows you to “lock-in” some of your profits that you may have seen over the past few years as markets have appreciated.
For example, let’s say you bought a property in 2012 for $200,000 with a $160,000 mortgage, but the property has since appreciated and is now worth $300,000. If you go to the bank, you would be able to take out debt for up to 80 percent of the property’s new value for a maximum debt of $240,000.
In other words, you can take out $80,000 in additional HELOC funds now ($240,000 minus your $160,000 outstanding mortgage). If you wait until after the recession starts and the property value declines 10 percent, you would only be able to take out $56,000 in HELOC money (the reduced property value only allows you to take out up to 80 percent of $270,000, which is only $216,000).
With a real estate market drop of 10 percent, as in the example above, you would have lost 30 percent of your potential line of credit had you not taken it out while the market was up. That’s money that you can no longer use for future investments.
However, this does not mean that you should overleverage. Taking out too much debt can be a bad thing, so always tread carefully.
Have a Plan
Figure out what you want to do now before the conditions change.
If the market drops 10 percent, will you go on a buying spree or will you sit tight? Are you looking to expand your portfolio? Or are you just wanting to solidify your current holdings? Whatever your goal, have a plan for your portfolio in the event the market takes a sharp nosedive.
This can help to take some of the emotions out of rough economic times. Make the potentially hard decisions now while they are easy, and then execute them when the conditions do change to where they make sense!
Consult a licensed financial professional if you are unsure of where to turn next. He or she can help you determine the best strategy for your specific needs.
Be Ready to Adapt Your Strategy Quickly
If you are used to investing a certain way (i.e. conventional mortgages, heavy rehabs, buying foreclosures, etc.) be ready to change your strategy to take advantage of new opportunities. You never know what the market will bring.
A certain sector of the market might start doing very poorly while another might start doing incredibly well. It might make sense to start investing in that other sector once the market changes. Recessions, as bad as they are, still bring a lot of opportunity. Be ready to pounce on them.
Conclusion
No one wants recessions. If we had a choice, we would want the market to go up forever. But, for one reason or another, recessions happen. Be ready for this reality.
Hard times are what separate savvy real estate investors from the rest of the pack. Always be prepared for a market downturn. If you are not, not only are you putting your own portfolio at risk, you might miss a massive opportunity to jump to the next level, and that bears a large cost in itself.