Think back to the real estate crash a few years back, when the bubble exploded and people were trying to survive a massive downturn.
Today, reputable sources are warning of another real estate crash, with articles in publications like Business Insider and MarketWatch explaining the reasons investors should be concerned about another crash in the future.
No one knows, however, whether a real estate crash will occur in years to come, but savvy investors build contingencies into their investment plan for economic downturns, and even for a crash of the real estate market.
So, we want to share Conor Flaherty’s 5 tips every investor should consider to survive the next real estate crash, along with our own observations.
#1 Buy Investment Properties That Rent Below the Median
One of the best ways to protect yourself from a potential crash in the housing market is to purchase investment properties that rent below the median for that area.
This strategy protects you in the event of an economic downturn, by having a portfolio of affordable rental homes.
If there is a real estate crash, people will gravitate to lower rent options. But if there is not a crash, you still own investment properties that generate cash flow and profits.
#2 Sufficient Cash Reserves
Cash reserves are important for every business, and real estate investing is no different.
Investors who over leverage their rental properties, barely covering expenses with cash flow, will eventually see their empire collapse.
In his article, Mr. Flaherty recommends having six months of expenses available in cash. And in the event you are unable to accumulate the cash reserves, consider partnering with another investor who can add cash to the business.
#3 Be the Best Landlord
Landlords with an outstanding reputation, offering affordable rental housing, are in the best position to weather a substantial downturn in the market.
Superlative reputations are not built in a day, week, or even a year. They are built over time, with numerous happy tenants telling their friends and posting positive reviews.
With this in mind, it’s important to hire top quality property managers who will build your reputation as a landlord, so you are better equipped to survive a real estate crash.
#4 Aggressively Manage Cash Flow
For some people, investing in rental properties seems like an easy way to make money, but they neglect to manage their cash flow.
Managing cash flow begins before purchasing an investment property. Correctly estimating expenses, monthly rent, and debt service for a property is critical to buying a property at the right price, rehabbing it within budget, finding tenants to pay the estimated rent, and generating profitable cash flow.
Managing cash flow also includes selling properties that are not generating the cash that is needed to be profitable, even if you take a short-term loss.
Perhaps, the most important ratio to watch when managing cash flow is the Debt-Service Coverage Ratio (DSCR), which is the ratio of net operating income to total debt service.
DSCR = Net Operating Income (NOI) / Total Debt Service
To calculate the DSCR of a property, take the income after all operating expenses, and divide that number by the amount paid for debt service. For example, a property that rents for $1,200 per month, with monthly operating expenses of $250 and debt service of $600, has a 1.58 DSCR.
A DSCR ratio less than 1 is negative cash flow, and a number greater than 1 is positive cash flow.
To aggressively manage your cash flow, target a minimum DSCR ratio of about 1.3 or higher.
#5 Make Conservative Choices
It can be very tempting to grow your business quickly, and get rich in just a few years of investing.
An overly aggressive investor may buy numerous properties quickly without due diligence, over leverage properties to buy more, ignore properties not generating sufficient cash flow, etc.
Investors, though, who take a conservative approach, realizing that markets go up as well as down, and that they’ll probably live through at least one major real estate crash, are the individuals who are successful at the end of the day.
These investors purchase the right properties at the right price, keep an adequate reserve of cash, take care of their tenants, and aggressively manage their cash flow to ensure the sustainability of their business.
For more insight into surviving a real estate cash, read Conor Flaherty’s article, “5 Ways to Stay Afloat When an Eventual Real Estate Crash Happens”.
Graystone Investment Group
Graystone Investment Group is an experienced Investment Group, wholesaling single-family and multifamily investment properties in metro Tampa Bay.
Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.