As mentioned in my last blog post, I believe we are at the very beginning of a slowdown in the real estate market. And from the responses I received from this article, it is readily apparent that I am not alone in my assessment. Let’s assume for the moment that we are correct, that the real estate market is weakening. If true, what do real estate professionals and investors do to prepare for the downward phase in the real estate market? I have five suggestions:
1. Stop buying.
As the saying goes, “If you find yourself in a hole, stop digging.” By that I mean don’t continue buying expecting that the market is going to turn around soon. This cycle in the real estate market will not be a temporary downward blip. It will likely be a long-term trend. And it will likely be years before it bottoms out and begins the upward cycle again. Don’t be a lemming. Don’t continue buying commercial real estate because everyone else is buying.
2. Get rid of your loser properties now.
If one of your rental properties is performing poorly during the good times, how much less are you going to like it in a weakening rental market? Now’s the time to dump it. I believe in the Greater Fool Theory. Find a greater fool than you were when you purchased this property to unload it on.
3. Hunker down with cash.
Instead of doing a 1031 exchange on the sale of your loser property (see #2 above), consider paying the capital gains taxes in order to add cash to your balance sheet. A good accountant should be able to provide a ballpark estimate of what your capital gains tax will be well before the actual closing date. If the tax amount is not too onerous then don’t go through the process of finding your exchange property. Instead deposit the money into savings. Not only will this help you bolster a rainy day fund should there be a prolonged downturn, but it could be the seed money needed to buy your next purchase when the market bottoms out.
4. Continue waiting for the “fat pitch.”
In baseball, a pitcher that’s behind in the count, has to get the next pitch across the plate or risk walking the batter. The pitcher knows that and more importantly the batter knows that too. Even in a down market there are bargains. Granted, they are harder to find but they’re still out there. Be patient and wait for the “fat pitch.” Kiss as many “frogs” as you dare to so you can eventually find your next “prince” of a property to purchase.
5. Refinance properties with less than 3 years remaining on the loan term.
During the Great Recession many investors lost their properties when it came to time to refinance. These real estate owners didn’t have their properties foreclosed on because of non-payment of their mortgage. No, they were current on the loan. But when the loan came due their properties were not financeable. Either the vacancy rate was too high or the few lenders who were lending were offering very conservative underwriting criteria resulting in a loan amount that was less then the loan they were paying off. Regardless, borrowers had to come to the closing table with cash in order to get a new loan. And if they hadn’t socked away cash during the good times they lost their properties to foreclosure.
If you have a property whose loan term is less than three years from coming due, I suggest you consider refinancing now. Refinance even if there is a small prepayment penalty. Why? Two reasons:
- Interest rates are rising and now is the time to lock in historically low interest rates; and
- No one has a crystal ball (including me) that can guarantee you that when your property’s loan comes due that you will have the ability to refinance it. If we truly are in a downward real estate cycle, don’t get caught in the same predicament as those investors who found themselves during the Great Recession unable to refinance their properties.
Those are my thoughts. I welcome yours. What do you think we should do to prepare for a weakening real estate market?
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