How to Protect Yourself from a Real Estate Market Crash
Let me preface this by saying loudly and clearly that A MARKET CRASH IS NOT IMMINENT. There are no predictions right now that a crash is on the horizon. So don’t freak out. I’m not writing this because I have some insider knowledge that the economy is about to tank, or anything like that. Rather, I’m writing it because things are actually looking pretty sunny for real estate investors, and that means now is a great time to examine your situation and make sure you’re prepared for a crash. Because even if there are no signs pointing to one, you can never be too careful.
Look, we all remember what happened in 2008, and some of us are still feeling the effects of it. While I don’t foresee a burst housing bubble event recurring (namely because banks and other lenders have changed a lot of their lending policies since then), there are other ways an economic downturn can hurt you.
And that’s what I want to talk about today. Or, more specifically, how you can protect yourself in the event this happens again – because it will. We don’t know when, and we don’t what will precipitate it, but history has shown that crashes are part of the economic cycle. They’re bound to happen at some point. Rather than just hoping that it doesn’t happen anytime soon, you should be taking steps to protect yourself in the event it does.
Here’s how you can be proactive and protect yourself from a real estate market crash:
- Buy properties with cashflow in mind. You want plenty of cashflow coming in with your rental property. For any buy-and-hold investor, it’s all about this steady income, and not so much about rapid, forced appreciation and a quick payout. While that’s certainly an effective strategy for quick wealth-building, it’s not the best choice when your focus is on investments designed to last during a market crash. For this, you want an investment that performs for the long-haul, month after month.
- Don’t buy properties that rent too high. One of the things past crashes have taught us is that people just don’t have money to spend on high rent during these times. Part of every paycheck will need to go toward housing, of course, but they’re not going to put more of that money toward it than they need to. Times are too tough for that! So this is when it pays to have a property that rents at or below the median, rather than above it. Those high dollar units are going to be the first to be vacated during a crash, so target properties with median rental rates.
- Pay down mortgages and reduce debt. Having too much debt can spell disaster in a crash climate, so make sure you’re paying it down as quickly as possible. I realize that some people don’t share this philosophy, as financed real estate can be used as leverage to purchase more properties. However, I don’t think massive amounts of debt is ever a good idea, especially if the economy is struggling. Give yourself some breathing room by paying down mortgages and other debts.
- Avoid properties that need major remodeling. Remodeling = major expense. Properties in need of work fall below market value, which is the exact opposite of what you want during a crash situation. Unless you’re an investor who’s experienced with renovation work, it’s safer to buy properties in good condition that don’t need a lot of repairs or updating. Doing this, and then maintaining the home properly afterward, will help keep the property’s value steady and better insulated from market fluctuations.
- Diversify your assets. I really can’t stress this one enough. One of the best ways to protect yourself in the event of a real estate crash to make sure your investments are diversified. Don’t invest ONLY in real estate, and with your real estate investments, don’t limit yourself to just one market or one type of property. You know what they say: don’t put all your eggs in one basket.
Don’t stress too hard about the real estate market crashing, but do take steps to be proactive. You never know when this situation may occur, and your best bet for surviving it with your finances intact is to take the advice above and protect yourself.