6 Ways to Prepare for the Next Market Crash

by | BiggerPockets.com

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.

Related: This Could Devastate Your Real Estate Investing Business

How to Recession-Proof Your Real Estate Business

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

What have you done to prepare for an impending market downturn? Any tips I haven’t mentioned here? Any questions?

Leave a comment below.

About Author

J Scott

J Scott is a full-time entrepreneur and investor, living in the suburbs of Washington, D.C. In 2008, J and his wife, Carol, decided to leave their 80-hour work weeks in Silicon Valley to move back East, start a family, and try something new: real estate. Since then, they have bought, built, rehabbed, sold, lent-on, and held over 300 deals, encompassing over $40 million in transactions. J also runs the popular website 123Flip.com, is an active contributor on BiggerPockets.com, and is the author of three books on real estate investing. His books, The Book on Flipping Houses and The Book on Estimating Rehab Costs, have sold more than 100,000 copies in the past five years and have helped investors from around the world get started investing in real estate.

7 Comments

  1. Andrew Syrios

    Great points. Market corrections can ruin you, but they can also be an incredible opportunity. If you at Warren Buffet’s returns, for example, he pretty much tracks the market during expansions and then skyrockets during recessions while everyone else gets hit hard.

  2. Cody williams

    Hey J,
    Instead of “hoarding cash”, what’s your opinion on principal paydown on outstanding loans? If you’re holding an interest rate of 5%, a principal paydown will provide the likewise return, minimize risk during a recession, and may be accessed via a HELOC when the market is right to start purchasing again.

    • Thomas Conway

      The general idea is that asset prices will be depressed during a downturn. Your potential return on investing the money in a depressed asset could far exceed the 5% interest you’re paying on that loan when the market picks back up again. So there would be an opportunity cost.

      As far as paying down your mortgage and getting a HELOC there are some things to think about. First, in 2008 people’s HELOC’s got frozen by the banks. If the next downturn is close to as bad or worse than 2008 your HELOC may very well be useless. Second, there is a likelihood that an economic downturn will have an interest rate hike attached to it. Therefore, it is going to cost more to use your HELOC since HELOC’s are variable interest rate tied to the prime interest rate.

      You can hoard your cash in high interest savings account so you’re at least making something on your money until it is time to use it. 2.00-2.50% is better than nothing. Yes, there is an inherent cost here too since you’re paying 5% on that loan while only making 2.00-2.50% on your money hoarded in a savings account. At that point it is a matter of how strongly you desire having the ability to pounce on a down market when it happens next.

      • J Scott

        It’s unlikely that interest rates will rise during a downturn. The Federal Reserve uses interest rates to spur the economy or slow it down depending on the need. During a downturn, the FED will typically lower interest rates to spur spending and discourage saving.

  3. Cynthia Bentley

    I bought my brand new 2 master BDRM 2 1/2 bath Santa Cruz home mid year 2006 for $800,000 as fast as the ink dried my home dropped to 480,000-everyone on my street either did a short-sale or went BK-I am the last man standing. It has taken all these years to get back up there; now it is worth about 900,000. My question is should I sell or ride this out again. I am single 58 years old-I don’t have time to chance anything! The housising crash took me to my knees, I can’t financially do another one. I saw a home in Capitola Ca for 989,000-it is a bigger home, better neighborhood, does need some work. I’m trying to look at the bigger picture for my retirement. The homes in Capitola are more expensive & seem to inflate much higher than Santa Cruz. Should I stay put & just keep paying on my current home I owe 550,000. Should I make that leap & hope for a greater return on a sale in 9-10 years? The other issue in Santa Cruz is we have a MAJOR homeless issue going on-I fear this is bringing out housing prices down-Capitola does not allow homeless people, they load them up in the police cars & drop them off in my neighborhood-Thanks Cindy

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