How to Capitalize on Real Estate Investing During Recession
Real Estate, believe it or not, is cyclical. It ebbs and flows, which is usually affected by the general economy. So, it's not a question of if but when for us. The future is not exactly like the past but it usually rhythms.
That's the question no one can answer though there can be hints at times. We don't fear it because we are ready for a slowdown. There are steps we take to mitigate that risk of a potential downturn.
Be Conservative in the Amount of Debt You Take on
First of all, we are conservative with the amount of debt we take out on properties and try always to buy on a better basis than the market (actually buy good deals). The reason is that we want to be able to absorb about a 30% hit and still break even. This could result from rent decreases, vacancies, or sudden increases in expenses. Essentially something pretty catastrophic would have to happen, probably nationwide, for that even to come close. The other bonus is that if you do lower LTV(Loan-to-Value) loans, you can usually get better terms on loans like more extended interest-only periods.
It is crucial to complement the above having substantial reserves and adding to it over time. We keep a minimum of 1,000 per unit in reserve. We also usually have some room in our CAPEX budget that there will be leftover for additional reserve. On top of that, monthly, we will leave some money aside. If we are doing well on the property, we may even keep slightly more to side in case of a hit later. So even if we need to come out of pocket some months, we have plenty there to back us up.
When modeling our deals, we do not take the refinance into account. We can't forecast the market, and we do not know what debt terms will look like in 3-5 years. Interest rates could change drastically and other terms like no interest-only periods. So, if the market takes a hit, we aren't relying on a refinance at a certain point to hit our numbers.
Location Continues to be Critical
Location for us is critical. We work hard to ensure we are in some of the best submarkets close to economic drivers. We will pay a little extra for those locations today. If the market takes a hit, the better areas stay filled.
We are huge on monitoring our monthly income/expense budgets. If we aren't hitting the goal on specific line items, we can see why. Even if as a whole, we are doing well, we still don't want that to be siphoned off by another problem area. If times ever get tough, this will be a practice we can rely on to keep a pulse on everything and better understand where we may make cuts if needed.
We have conservative underwriting. We are always are keeping yearly rent increases to market averages or below. Not letting the crazy run-up rents lately get to our head.
We don't allow ourselves to get caught in the new price increases being a never-ending thing. The last 18 months have been a bit crazy, and that will mostly not repeat. We don't let what possible prices could happen to get to our head either. So, we keep a steady hand and wait for the right opportunities. They seem to pop up with enough digging and persistence.
We Need to be Less Susceptible to Market Fluctuations
Our long-term approach to this business makes us less susceptible to possible swings. We are holding longer-term through the cycle where fluctuations in values in the short term won't matter. Usually, the only time we will sell is to buy something newer in a well-timed 1031.
Lastly, I would say it is necessary to keep operations in tip-top shape. Even though things are going well, we always find ways to improve and do things better. We have seen way too many terrible operators saved by this crazy market we have had the last couple of years. The ones that take asset management seriously and the day-to-day will shine when shit hits the fan. We don't fear the inevitable because our downside is always protected. Ultimately some kind of recession has always brought us more opportunities that we are strategically positioned to take advantage of.