Smart investors understand the sometimes-precarious nature of investing in real estate and plan accordingly.
If there is anything certain in real estate investing, it’s this: nothing is guaranteed. One quarter, business is booming and properties are full. The next, the economy is slumping, tenants are fleeing and the bottom line is getting thinner and thinner.
Smart investors understand the sometimes-precarious nature of investing in real estate and plan accordingly. Here are eight strategies for weathering real estate market volatility.
Why markets are volatile
Contrary to what some inexperienced investors might believe, real estate market volatility is not directly tied to renter demand. In fact, it begins well before a potential tenant comes to view a property.
Economic factors that can swing the market one way or the other include:
- Recession (or the threat of recession)
- World events that lead to market instability
- High-interest rates
- Inflation
In short, anything that worries consumers about their paycheck’s future or savings account can affect the real estate market.
9 strategies for weathering real estate market volatility
Fortunately, there are ways to protect your investments.
1. Don’t put all of your eggs in one basket
Maybe you got into real estate investment thinking of creating an empire of multifamily units for rent. But what happens when new properties are built, the renter pool gets shallow, and rent is no longer paying the bills?
It’s okay to start with one type of property in the beginning, but smart investors whether real estate market volatility by investing in different properties that include:
- Residential properties
- Commercial properties
- Industrial properties
- Medical properties
- Land
Additionally, spreading your investments out across a wider geographic area can help mitigate unpredictability. When one area takes a hit, the other might be spared.
2. Kick the can down the road
No, this does not mean putting off dealing with current volatility. It does mean thinking of real estate as a long-term investment, not a short-term windfall. Even properties that are not lucrative in the beginning can have a big payoff as they appreciate over time.
Keeping this frame of mind means you won’t make any drastic moves when hard times hit.
3. Invest with other people
There are two basic ways to invest with other people.
- Real estate investment trusts (REITs): REITs allow you to invest in someone else’s property. This takes the burden of investment, property maintenance, and management off of you and enables you to diversify your portfolio with a variety of properties. Investment in a REIT can also be liquidated much faster than physical property.
- Get a partner: When you partner with another investor, you share that investment’s profit and burden. It’s essential that you make this a legal business partnership, not an informal contract between friends.
4. Protect your cash
Cash reserves are critical for unexpected expenses, including major unscheduled maintenance or a jump in vacancy rate. Another bonus of a stockpile of cash is that it’s possible to grab other investments at low prices when the real estate market takes a downturn. Cash deals are often favored during these times as other (unprepared) investors liquidate their portfolios.
5. Pay attention
When the economy slows or world events loom, don’t stick your head in the sand, hoping it will pass. Pay attention to market trends and changes in regulations that can eat into (or bolster) your portfolio. This helps keep you agile and ready to change course if needed.
6. Don’t ignore the flipper
Some real estate investors focus primarily on ready-to-rent properties. Don’t let this be you. Value-add properties such as total rehabs or properties that could be repositioned often generate a better return on investment (ROI) than those shiny new buildings.
7. Invest in technology
Old-school investors may prefer phone calls and paper deals, but digital technology can help anticipate and cope with real estate market volatility. Data analysis tools are critical in understanding:
- Changes in property values
- Market trends
- Potential investments
8. Make friends
Many people think real estate is about numbers, but it’s really about relationships. When times get tough, real estate investors who cultivate relationships with other investors, brokers, lending institutions, and contractors are better able to weather the storm. These relationships can offer a wealth of information, insights, and advice — as well as potential investment opportunities.
9. Think quality, not quantity
Remember Monopoly? There are two types of people who play Monopoly:
- Those who buy up every property they can, regardless of board position, cash flow, or how many other properties they have.
- Those who are strategic, waiting to buy blocks of property on the second half of the board (or all of the railroads and utilities).
To better withstand market volatility in real estate investing, be like the second Monopoly player. Think of purchasing quality properties that add to your portfolio, not just every cheap building that comes across your desk. This helps you build a small but stable portfolio that grows over time, right along with your bank account.
