Real estate investing is full of ups … and downs. If you haven’t experienced the downsides, we guarantee you will eventually.
As a real estate investor, you have to be on top of your game. You didn’t get into this business to pull the sheets over your eyes … you’re here to build wealth, and that requires planning and preparation.
You can’t bet on disasters NOT happening … they most likely will. Careless investing is a sure recipe for a crash. Careful investing, on the other hand, will help you survive crashes without losing the wealth you’ve accumulated.
In this episode of The Real Estate Guys™ show, we discuss how YOU can prepare for storms that come out of nowhere. You’ll hear from:
- Your careful host, Robert Helms
- His criminally cautious co-host, Russell Gray
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The nature of real estate
The real estate market is naturally volatile. Economies change, local markets evolve, natural disasters arise … sometimes overnight.
The downsides are ALWAYS looming.
But real estate investors are always looking for the upsides … sometimes so intently that they forget to look at the downsides too.
We caution you to do your due diligence AND have a back-up plan.
Some excellent words of wisdom are to always have a little cash on hand. The downsides are rarely in your control … but you can control your ability to react when they arise.
Four ways to be prepared for a downturn
As real estate investors, we weigh risk and reward every time we look at a deal. But some risks aren’t so obvious.
Being a successful investor means playing defense and offense at the same time.
While you can’t predict the future, you can take practical steps to make sure you’re ready to fend off threats and take advantage of smart deals.
Step No. 1: Get in touch with a demographic that can weather a storm.
Tapping into the right demographic is the key to recession-resistant investing.
It’s a smart idea to look at markets where someone who is a bit under the median income can afford to live.
In tough times, people who are well-off can downgrade to your market. And in good times, people on the lower end of the income scale can move up.
Either way, your area will be in demand.
Many factors can cause a downturn … rising interest rates, slow wage growth, tax increases, or geographic factors to name a few.
Downturns aren’t solely due to nation-wide economic slowdowns. Make sure you pick a demographic that can resist small ebbs and flows in your market.
Step No. 2: Invest in towns that have multiple “stories.”
Every town has something it’s known for.
Even better is a town that’s known for many things … the stories that draw people and growth.
A big industry would be one story. Two big industries? Even better. A major sports team might be another story.
Don’t bet on a single story. Make sure the jobs in your market are tied to multiple industries … that way, when one industry fails unexpectedly, you won’t see a mass exodus or decline.
And be sure an area is appealing for more than one reason.
Step No. 3: Monitor your inputs.
Look at what inputs make the numbers on your financial statement move. These are the inputs to keep track of.
Compile data, set up alerts, and don’t be remiss about digging deeper when an alarm goes off in your head.
All the information you need can be found in one way or another. The internet is a treasure trove of data. Your local Chamber of Commerce is another resource for keeping track of essential information.
Don’t be casual … especially if you’re an experienced investor. Treat every deal like it’s your first.
Monitoring your inputs can help you stay ahead of the curve and react to changes before others even know there’s a threat.
Can you see the advantage?
Step No. 4: Key into experts.
We live in the information age … it’s almost ridiculous how much information is available.
But some of the best information comes from people who have been in your situation and figured out solutions.
Listen to and read information from multiple sources … even if you disagree.
Learn what other people are saying BEFORE you interject your own opinion.
You can’t expect the unexpected if you only listen to people who share your point of view.
Navigating the three rings of risk
We’ve learned a lot over the years.
One piece of advice we think highly of is to always own a property or two with no loan. The return won’t be as high … but you can sleep at night.
In investing, it all comes down to the rings of risk.
Every investor should have three rings of risk in their portfolio.
The center ring is your livelihood. It should be isolated from all the other risks you’re taking.
The second ring is those bread-and-butter properties that bring cash flow and provide long-term equity growth from modest appreciation.
The third ring is where your risky investments happen. You should only expand into this area after you’ve established the first two rings of your investment portfolio.
In the outer ring, you can be more speculative. You may lose quite a bit in this ring … you’re taking on way more risk. But you could also win big.
Another thing to keep in mind is your Plan B.
In any short-term play, make sure you have a Plan B and even a Plan C to take you through the long term.
Sometimes the market changes in the middle of your play. In that scenario, financing structures and a property’s ability to cash flow can be really important.
If you are house rich and cash poor, it may be time to sit down with a financial advisor and considering refinancing so you can leverage the equity you have in your properties.
You may also want to consider selling and buying new properties so you can get some cash on your balance sheet.
When the market turns, you want to be in a position to snatch up a bunch of cheap real estate … and you won’t be able to do so unless you have cash on hand.
Another consideration to take is whether to diversify your liquidity. If the dollar falls, precious metals will retain their value … and the more wealth you have, the more important it is to put your equity in a stable medium.
Your best strategy is a strong network
Knowing how to sell is the essential survival skill in a tough market.
We’re hosting our yearly How to Win Funds and Influence People event this year … a workshop that teaches participants negotiation strategies that result in win-win deals.
We host events like these because networking is SO important. The best way to prepare for the unexpected is to get around smart people and take note of their strategies.
Getting around people who’ve been in your shoes is essential … and most successful real estate investors are more than happy to share what they’ve learned.
We don’t only host events for investors like you … we also attend them! We’ll be at the upcoming New Orleans Investment Conference learning about all things investing with some of our most knowledgeable investor friends.
Your net worth is defined by your network. Make those crucial connections, and you have the key to staying strong through ups AND downs.
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