There is little doubt about the fact that a real estate market crash can be frightening for everyone, especially investors. When the market is good, it’s great; however, when it starts to slide it can be more than a little stressful. Many new investors often look to veteran investors and wonder how they are able to make it through the ups and downs of the real estate market year after year and come out relatively unscathed.
The truth of the matter, of course, is that many investors do not come out unscathed. Many become frightened at the first sign that the market may be about to slide and quickly exit before they become burned. The real secret to being a successful real estate investor lies in sticking it out through the bad times as well as the good times.
So, what do you do when the market does experience a downturn? How do you make it through it in order to take advantage of all the benefits when the market finally goes back up again?
First, try to avoid selling in a down market. Suppose the property that you have purchased for investment does go down in value. The best approach is to try to hold onto it until the market returns and your property goes back up in value. This can certainly be frightening and stressful at the time; however, if you examine the cyclical nature of the real estate market you will discover that it always comes back. The amount of time it takes for it to return can vary; however, real estate always bounces back.
One of the most common reasons that many investors sell when the market is in a downturn is that they are afraid the market will worsen. Of course, there is always that possibility. It has to hit the bottom before it can begin the climb back to the top.
Selling during this particular phase of the market is often an emotional decision and one that is frequently not well thought out. There are even some cases in which investors who sell during a down market find they must scramble to come up with the costs necessary to close the deal. Stop and consider for a moment the anatomy of such a decision.
The market has turned down and you are concerned it will get worse before it gets better. So, you sell the property at a price that is far below what you paid for it and perhaps even what you have it mortgaged for. The person who buys the property waits it out and once the market returns, which it will, they are able to take advantage of the great deal they made and ultimately turn a great profit.
Historically, there are always more renters during a down market than buyers. Why? Simply put, when the market is down many first-time homebuyers find they are frozen out of the market because lenders are more conservative and write fewer loans due to more restrictive underwriting guidelines. Since everyone still needs a place to live, many of these people wait out the market by renting. If you do sell during a down market, make sure that it is because you have given it plenty of thought and not because you are reacting to emotion.
Beyond waiting out the market downturn it is also a good idea to make sure that you have put aside some cash when possible. When you are already in the middle of a slump that can be difficult to do; however, when the market turns around again make sure that you put aside a little extra money in the event you experience a turn in the market. The extra money can provide you with a cushion until the market settles as well as ensure that when the market does turn around you have options available to you.
Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at-risk children.