How Real Estate Investors Can Survive a Market Downturn
Six steps to stabilize your portfolio and protect your investments in a fluctuating real estate market.
When COVID-19 shut down much of the world in early 2020, the S&P 500 began a 34-percent plummet. Given the widespread impact of the virus, a significant drop was to be expected. Less expected, however, was the speed of the following recovery.
In just six months, the S&P 500 recovered most of its losses and more. This turnaround was one the fastest in history, bolstered by government programs that helped individuals and businesses to stay afloat during lockdowns.
While a real estate market crash is not inevitable, 2022 could see a slowdown in growth. As an investor, it’s important to prepare for what comes next.
Steps to Survive a Market Downturn
When the Fed announced a series of planned interest rate increases aimed at slowing down inflation, investors shuddered. After all, low rates have allowed first-time investors to enter the real estate market and veteran investors to rapidly expand their portfolios. With interest rates going up, housing stocks shrinking, and prices rising, it seems likely the market will experience a correction.
But preparing for a downturn is possible. For real estate in particular, there are six steps you can take to protect your investments and come out the other side stronger than before.
1. Plan for Worst-Case Scenarios
Start by figuring out where you would be if every tenant at each of your properties paid rent 30 days late. Go one step further, and calculate what would happen at 60 days or 90 days.
While you’re at it, imagine that your property occupancy rates dropped by 10, 20, or even 30 percent. Envision what would happen if the value of your property dropped dramatically.
While this might seem pessimistic, looking ahead to the worst-case scenario for your real estate investments can help you develop a plan to handle it.
2. Get a Grip on Expenses
There are two types of expenses: fixed, and variable. Fixed expenses are unchanging, and unlikely to be affected by a real estate market surge or a real estate market downturn.
They include things like:
- Routine repairs
- Property tax
- Mortgage payments
Variable expenses can include improvements on properties that are unrelated to regular maintenance. Looking ahead to a market downturn, evaluate which improvements will give you the best ROI — and which can wait.
3. Cultivate Better Relationships with Tenants
The heart of your real estate investment isn’t the property you buy — it’s the tenants inside.
Don’t let worrying about money cloud the fact that real estate is, at its core, about people. Cultivating better relationships with tenants is key when the market gets tough. This starts with improved tenant screening, keeping your properties in good shape (even when the rent is late), and working with tenants who are struggling.
4. Stay Focused on your Goals
You got into real estate investment for a reason. Hopefully, you laid out both short- and long-term goals before you got started. A market downturn is a good time to revisit those goals and make sure you’re making decisions aligned with your objectives.
- Is your portfolio as diverse as you’d like?
- Are your properties performing well historically?
- If you’re looking at potential purchases, are you compromising or sticking to your investment criteria?
- Is there another investment space you can move into (e.g., FSBO properties)?
- If you’ve liquidated a property, can you use a 1031 exchange to defer taxes?
If you haven’t taken the time to outline clear goals, use a potential market downturn as a time to look ahead with a clear plan.
5. Build Up a Cash Reserve or Open a Line of Credit
Even with perfect planning, you may find yourself in need of quick cash. Building up a cash reserve is the real estate investment equivalent of making hay while the sun shines.
Consider the following actions to help ensure easy access to the funds you need:
- Open a line of credit on a property
- Delay a major purchase and store the cash
- Sensibly liquidate a property (before the market drops)
6. Don’t Panic
Panicked investors may be tempted to liquidate their portfolios, unloading stocks and properties before they lose a penny of profits.
Resist this urge. With housing starts and construction permits up heading into 2022 and home prices still on the rise, it’s wise to sit tight to see what happens. While strategically unloading poorly performing properties or other investments can free up cash, history shows us gradual corrections are more likely than disastrous downturns.
Stay informed, and don’t make hasty decisions.
Good News Going Forward
The good news is that even in some of the worst financial crashes, real estate remains remarkably stable. Taking these six steps can help stabilize your portfolio and protect you from whatever the future holds.
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.