Real estate markets are constantly changing. Even if they have remained flat over the years, you never know when the next shoe will drop. As an investor it is essential to always stay one step ahead of the market rather than one step behind. With the stock and global markets as volatile as they have been in recent months you can anticipate your local market being impacted too. This can change everything from where you invest to the types of properties you look for. It can cause you to structure your deals differently and even alter the way you run your business. The current state of your primary investing market shouldn’t prohibit you from investing. However, it does change where, when and how. Here are five tips for investing in any market.
- Cash Is King: History has a way of repeating itself. There were many lessons to be learned from the mortgage collapse a decade ago. On the investing side it wasn’t the sudden dip in property values or the lost rent that got investors in trouble. It was ultimately the lack of reserves to deal with these problems. If they had reserves, they could have bought some time with their rental properties until they found another tenant. They could have taken advantage of lenders looking to liquidate by making cash offers with quick closings. As boring as parking your money in a low yield account can be, it will also be the best move you can make if there is a dramatic shift in the market. The saying that cash is king is not just an overused expression. In times where credit is hard to find, cash is the single most powerful asset in the world. If you see your market declining or have become spooked by the global markets, put some of your capital in cash.
- Review Credit Report: Another valuable lesson from the mortgage collapse was that getting mortgage money was next to impossible. Without near perfect credit, significant down payment and months of reserves you had a tough time getting approved. Now is the time to look at your credit report and work on improving your score. A good score is not good enough in a down market. You need your score to be excellent, 740 and above. If there is a lingering delinquent account, it may be pulling your score down without you even knowing it. It is a good idea to monitor your report at least every 90 days, just to see if there are any new accounts or any alerts have popped up. If you really want to watch your credit you can sign up with a credit monitoring service that provides automatic alerts any time, there is any activity on your report. Either way, it is best to stay on top of your credit, so you know it can be an option if you need it.
- Utilize HELOCS: One of the best ways to take advantage of equity is through a home equity line of credit. Instead of refinancing and adding new closing costs you can simply put a line of credit behind your original first mortgage. That line is only repaid when you use it. If you see that your market may be in trouble, or you need a cash infusion you should tap into your line. Many lenders stop issuing lines of credit or put a freeze on them during the mortgage collapse. This took many homeowners by surprise and caused them to find other sources of capital. Once the money is withdrawn you can use it as you please. Even if you put it in a regular savings account you know it is there for a rainy day. The best feature of a heloc is that the payments are interest only for the first ten years, further helping you hoard as much cash as possible.
- Don’t Speculate: There is a time to speculate on deals and a time to be conservative. Speculating in hot markets often gives you a bit of a soft landing even if things don’t work out as you anticipate. However, in a declining market you need to err on the side of caution. As we stated, the rug can get pulled out from under you at any time. If you are shooting for the moon on a rehab you may over improve the property, leaving you with an asset difficult to get rid of. Not only will you have a tough time selling, but you may not be able to get fair market rents either. Speculate on markets ascending, not ones that are set up to decline.
- Consider Worst Case Scenario: Regardless of market conditions it is always wise to have a back up plan. You will be surprised at just how often your primary plan falls through. If you think your market may be on thin ice, it is even more important to consider the worst-case scenario. What will happen if demand shifts or the cost of materials rises. You don’t have to be obsessed with everything negative, but you should recognize the potential for it. Having a reliable plan B or C can help you get out of a tough spot quickly, while still saving face and making a profit. Without it you will scramble around for an option that may not be there when you need it.
Preparing yourself for a change in the market shouldn’t be something that is done overnight. It should be a slow process that you think about for weeks, if not months. It is always better to be a step ahead, rather than a step behind.