How to Prepare for a Market Crash | Real Estate Investing

We’ve been hearing about it ad nauseum: a recession is likely on the horizon.

For those concerned with the potential of a market crash, there are multiple great techniques for protecting your money and taking advantage of the current climate in preparation for the storm ahead.

Here are the six things I recommend people do to prepare.

How to Recession-Proof Your Real Estate Business

Hoard Cash

Move assets to cash. “Cash is king” is all too true. When the market turns, lending can be really tight. The people who were getting the deals during the last recession were the ones that had the cash. Right now, hoard cash. Don’t spend cash on anything you don’t have to.

Open Credit Lines

Now’s a great time to open credit lines. I’m not saying people should necessarily borrow money against their credit or run up credit cards or open a HELOC and take out the money—but have the money available. This is because the next best thing to cash is a credit line. You want to know you have it available in case an incredible deal comes along and banks decide to stop lending to you. You don’t even ever have to use it, but it costs you nothing to have it available.

Boost Credit Score

It’s also the best time to raise credit limits and build credit if you need to. Right now, you can go to the bank and get a loan with a 660 or 680 credit score. But anybody that was around in 2008 to 2010 knows that when the market turns, you’re probably looking at 720 or 740 to get a loan. And it takes six months, 12 months, 24 months to build your credit back up if it’s not good.

Dump Risky Assets

Get rid of anything that can’t handle a 15 or 20 percent drop—whether that’s a flip or rents or occupancy rate. Get rid of properties that won’t be able to withstand a significant dip.

Restructure Short-Term Debt

Interest rates are really low right now. In two years, not only could interest rates be higher, but also if you have a loan that’s coming due and the market’s really bad, the lender may be hesitant to restructure that. They might just say, “Pay me off. I don’t want to extend this.” So, if you have loans coming due soon, restructure now if possible.

Don’t Chase Losses

This is a big one for house flippers. If you see the market start to turn in your area, cut your losses. I saw way too many people in the last downturn who chased the market down. They bought a property and one day realized they were going to have to break even on the property because of the market. They didn’t want to, so they tried to wait it out. Before they knew it, they were down 1 percent, then 5 percent, then 8 percent. They didn’t want to lose a little, so they waited and ended up losing a lot.

Watch my video above, where I go into a little more detail about each technique.

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