Doomsday Real Estate Prepper

Do you have a SHTF plan for your real estate business?

As a millennial in your mid-twenties, job security can be a laughable concept. Our parents’ generation clung to it, boasting 20 years of service within one organization and proudly wearing the company watch they received to commemorate that dedication. There is plenty to admire about our parents and grandparents. Loyalty and dedication are characteristics chiseled in stone. 

It could be our millennial attitude, which gets plenty of press time already, or it could be our entrepreneurial spirit that makes our mindset on work slightly different. I am not attempting to defend millennial attitudes in this writing. A lot of people my age, just need to suck it up and grind it out.  

Having an honest understanding of our circumstances can help us better prepare for all the wrenches life throws at us. And you better believe it will.  

Whether you are looking to get into real estate as a passive investment, or you are already a seasoned owner and manager of an income property fortfolio, you should have a Mitigation Plan ready to go within your financial game plan. This may seem like common knowledge for a long time investor who has their properties systematically structured and self-sustained. But for a relatively new investor, it could be the difference between successfully utilizing your assets and being on the selling end of a GREAT DEAL for another investor. The following are a list of preparations that will help you manage your income properties when times get tougher (job loss, unexpected medical expenses, poor returns in personal business, etc.) 

1. Be prepared to manage your own property. 

A correctly purchased property can be managed hands off because it has enough cash flow to hire a property management company. This is a sweet position to be in, with multiple properties and units being even more passive, because someone else handles the dirty work. However, you should be prepared to fire your property management company and absorb that extra 10-15% of income. Preparing for this means having some of the capital and tools required on hand. It also means being dedicated to take on the tasks of: mowing, repairs, tenant replacement, etc. A young investor that has four rentals, and cash flows $300 on each, brings in an extra $1,200 a month. If he or she loses their job, and needs to live off that cash flow in between jobs, taking over your own property management can add $120 to your bottom line. That’s enough to cover a month of food in my budget. 

2. Have a Quick Rent Plan. 

Haste makes for waste. Have a plan to get any unfilled units filled promptly with a quality tenant. I will gladly market for an extra month to get a unit leased for the top market rate. However, when covering your debt service is most important to protect the asset, you need to know your flexibility on rent rates. Waiting an extra month for marketing to bring you a tenant paying $1,000 vs. $800 brings an extra $2,400 in for the years rent roll (subtract $800 for the opportunity cost of waiting a month and that is still an extra $1,600. Worth it.) However, when a gamble isn’t worth it, you need to know that renting at market average will suffice, covering your debt service and providing some cash flow. Run these situational metrics beforehand, so if you are in a hurry you can make an accurate and calculated decision without hasty consequences. 

3. Have an Emergency Savings. 

This really should be step one in your preparation plan, but I didn’t want to have such a novel concept lead off my plan of action. Income properties are a business, and should be respected as such. A person operating a trucking business with no savings to replace engines would be foolish. As would a real estate entrepreneur. Most lenders require you to have 3-6 months PITI payments in savings to purchase a property. After you make that purchase, just leave it alone. Then double it. This will provide reserves for improvements while times are good, and provide a buffer should it be needed when times are tough. I would recommend putting these savings in their own account that is separated from your disposable income account. If you burn through your personal savings you do not want to allow yourself easy access to this money. Guard your asset at all costs as a priority. 

4. Have a Line of Credit Prepared. 

Waiting an extra month for marketing to attract the right tenants can bring in extra income. So can adding extra amenities. These “micro-investments” can make your unit immediately more attractive and command higher income when you need it. When times are good, I always prefer to make improvements with cash. It is in some peoples nature to only use cash, but be prepared to utilize good financing when you need it. Financing is good when it brings you more money!  Always calculate the cash on cash return of these investments.

This should be an easy step. You are a real estate investor, banks love you. I have been happy leaving window units in two of my rentals. However, I can use the extra cash now, so I will be putting central heat and air in my units immediately. This will put the units into a higher rent bracket and bring in more cash flow. In my area, units without central air rent at 500-700 and units with central air rent at $700-1,000. This can be a quick 20-30% rent increase. Pay off the credit slowly when you need the extra cash and when you get back on your feet, pay it off immediately. 

5. Have an Emergency Budget to Implement. 

You may have rolled your eyes at me in Step 1 when I said I can budget food for a month on $120. When times are good, this is closer to my weekly budget on food. I love eating good, quality food and having a freezer stocked with high end fish and beef cuts. However, being fresh out of college, I still remember how I made it on eggs and tortilla roll-ups (email me for recipe). While you are not stressed with a lack of income, make a menu that you can eat on $25-30 a week and enjoy it! It is so doable. That’s an immediate challenge. I did this after being in the professional world for a year and although it wasn’t needed at the time, I was able to stash away an extra couple hundred bucks in addition to my regular savings rate. For someone looking to buy their first property, I would start doing this NOW. How much money you make is second to how much you keep. 

6. Enjoy Your Financial Freedom at Every Step of the Journey.

Why did you start building a real estate business? To retire at 35 and travel to the world’s finest beaches, of course. However, there is a benefit to having this extra income stream you have built. Even if you only have one rental and $300 per month in cash flow. That is $300 less your savings is depleted every month while you look for the right job or next opportunity. Enjoy and appreciate it for what it is, even before it makes you ultimately independent. Life is a journey with many winding roads, road blocks and storms to navigate. Make sure your real estate businesses has a map to serve you when the storms come.

"It is only through labor and painful effort, by grim energy and resolute courage, that we move on to better things."  - Theodore Roosevelt