The real estate market is constantly changing. Anyone that was in the business last decade knows just how quickly things can change. One minute your business is riding high and the next you are left wondering what happened. The best way to protect yourself is to always brace for the unexpected. By acknowledging that bad things may happen you are able to act quickly if, and probably when, they do. The quicker you act when something unexpected comes your way the better decisions you will make. Nobody in business likes to consider the negative but by protecting yourself you are equipped to withstand whatever comes your way. Here are five things you can do to protect your business from the unexpected.
- Understand Exit Strategies. Even before you make an offer you should have an idea of what your exit strategies are with the property. As you will find there will always be times when things come out of the left field that will cause you to shift gears. When things pop up you need to be able to act on your exit strategies. If you have a rental property you should have some idea of what properties in the area are selling for. What would be the minimum price you would consider selling for in a pinch? The same is the case with any rehab properties you are working on. If something negative comes up what are the things can you do to combat it? Every day that goes by without action costs you money and probably makes the problem worse. Prior to getting involved in any deal or any property you need to know exactly what your exit strategies are.
- Increased Cash Flow Rentals. In the world of real estate investing numbers don’t lie. It is important that you listen to them when they are right in front of you. If you pursue a rental property that needs everything to break right eventually the damn will break and you will be in trouble. The best way to avoid potential disaster is by only looking for properties with strong cash flow. Increased cash flow gives you the option of lowering your rent to avoid a vacancy in a pinch. It also offers protection in the event that another property in your portfolio isn’t performing as well as you would like. Increased cash flow allows you to manage the property the right way and always make the best long term decisions. Instead of stretching to rent to someone who has red flags in the past you can wait a few extra weeks to find a tenant you are truly comfortable with. All it takes is a sudden increase in property taxes or insurance to throw your projects out the window. If they rise you will be glad that you had the cash flow surplus to brace for the change.
- Multiple Lead Sources. You never want to put all your eggs in one basket. Lead sources that may produce great results today can completely dry up in just a few weeks’ time. By dumping most of your reserves in one lead generation basket you can quickly run out of money with little or nothing to show for it. Just like in every other area of your business you need to diversity your lead sources. A few short sale and foreclosure leads are fine but you also need to mix in a couple of probate leads. With lead diversification you should also look to mix up where you buy. Having six houses on the same street may seem like a good idea but if the market changes you will be in real trouble. You need to constantly mix up where you find your deals, the market they are in and what type of holdings you have.
- Equity. Knowing your exit strategies is only meaningful if you can actually pull them off. You may have an idea of how much you need to sell your property for in a pinch but does the market justify that number? With any long term property in your portfolio you should make it a point to constantly boost the equity. This can be done in a variety of ways. The first is by making improvements and upgrades. The problem with this is that work done today may not hold its value five years down the road. You need to do the right work for the property and the market. The next way to build equity is by paying down the loan balance. In addition to your regular monthly payments you should add an extra payment or two a year. By making just one extra payment to a 30 year mortgage you can knock roughly 12 years off the balance. Even if you don’t want to hold the property for that long a reduction in balance gives you opportunity to sell or even refinance if something unexpected comes up.
- Reserves. The best way to brace for the unexpected is by having capital reserves. Reserves allow you to deal with a sudden vacancy or maintenance issue in a rental property. It can help get through an extended gap between closings and pay for leads to grow your pipeline. The biggest problem for investors during the mortgage collapse wasn’t the change in interest rates or even rising home prices but rather a lack of reserves. If reserves are present you can buy time until there is a positive change in your business.
There will always be areas in your business that are out of your control. Use these five tips to help deal with the ones you can brace for.
