Ways Investors Can Survive a Market Downturn
- Author Kelly Leigh
- Published March 6, 2010
- Word count 779
We all know that a real estate market downturn is frightening for everyone - including investors. When the market is doing well everyone is happy; but, when it starts to go South it can get very stressful. Many new investors sometimes watch veteran investors and can't understand how they manage through the uncertainty real estate market year after year and survive - often thrive.
Well, we all know that not all of them come out on the other side unscathed. Many get scared early and exit the market to avoid getting caught up in the downturn. Some don't have a choice - they don't have the capital resources to stay. The real secret to being a successful real estate investor lies in sticking it out through the bad times and capitalizing as much as possible when times are good.
So, what should an investor do when the market does experience a downturn? How can investors navigate through and then be in position to take advantage of the many benefits when the market finally goes back up again?
First, try to avoid selling in a down market. This may seem obvious, but many investors don't understand this concept and this is their first response to a crisis. If property you own for investment goes down in value, the best approach is to try to hold onto it until your property value increases. This can definitely be nerve-wracking, but if you've done your homework on the real estate market you'll know that it will come back. The real estate market is cyclical and it won't remain at a high or a low forever. Timing will vary, but if you can stick it out, the market will recover from a downturn or even a crash.
One of the most common reasons that an investor may sell when the market is in a downturn is that they are afraid the market will get even worse. Obviously, that's always a possibility. The market will have to get to the bottom before it can begin the climb back up.
Selling during this down phase of the real estate market is usually an emotional decision that isn't well thought out. If an investor decides to sell in a down market and then has to scramble to come up with the funds to pay the costs associated with the sale, this is a sure indicator that more thought needs to go into the sell decision. The best plan would be to step back and look at your options before selling the property. Note all the costs required to sell vs. the costs required to keep the property. Make decisions based on facts - not emotions.
If an investor sells a property below what they paid for it, the buyer will often wait on the market to leverage the great deal they just got on your property. So, they'll hold it, repair it if necessary, rent it, and then sell when the market goes back up. Obviously, in this scenario the original investor just gave the new investor a big payday when it may have been possible for the payday to come back to them.
So, it's far better to weigh all your options first. Historically, there are always more renters during a down market than buyers, so renting the property may be a great option. The reason there are more renters in a market downturn (and certainly a crash) is that would be homebuyers can't get qualified for loans because lenders become more conservative. They implement more restrictive underwriting guidelines and requirements so fewer loans get approved. This puts more people back into the rental group while they wait to be able to purchase.
So if an investor does decide to sell during a down market, he should make sure that it is because the decision is the right one based on facts, not emotion.
Another important tactic to managing through a real estate downturn as an investor is to put aside some cash when possible. This can be difficult, but to keep extra funds available is a good idea no matter what the market is doing, really. Having the extra money on hand as a cushion until the market settles means that an investor will have options at all times.
If possible, look for opportunities during a down turn. A smart investor is the one who finds those properties that someone else can't or is afraid to keep. Foreclosures are another opportunity in a down market. Sadly, some people don't manage to pay for and stay in their homes when real estate markets take a dive. This creates great opportunity for an investor if they're ready.
Kelly Leigh is a real estate investor with experience buying foreclosure, bank owned, and short sale properties. Her extensive research on this subject helps her help others.
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