4 Ways to Survive Future Real Estate Market Crashes

by | BiggerPockets.com

The real estate market may be very healthy compared to what it was five years ago, but that doesn’t mean we’re in some sort of eternal bliss. There will be rough patches ahead — and likely a couple more crashes in your lifetime — but how can you as an investor safeguard yourself against them?

4 Ways to Protect Yourself

“Historically, economic activity rises and falls in marked business cycles,” senior market strategist Susan Green explains. “Periods of recession appear and recede approximately every 5-10 years.” Thus, it’s reasonable to expect that we’ll encounter some economic issues in the next few years. They may not be as dramatic as what happened in 2008, but reverberations will likely be felt in the real estate market.

Luckily, there are a few ways you can protect yourself.

1. Buy properties that rent below the median.

You have to think one step ahead of the market. While it’s a good rule of thumb to have the best property on the street, you don’t want to be stuck charging a rent that’s higher than the median in the area. This may be fine during times when the market is healthy, but you’ll get swallowed up when the market falters.

People still need a place to live in a down market, but they’re naturally going to gravitate towards what they can afford. By purchasing properties that rent below the median, you can maintain steady occupancy rates, regardless of what’s happening in the larger economy.

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2. Be the best landlord possible.

It pays to be a good person. When you’re a likeable landlord who works with people, deals with maintenance issues in a swift manner, and charges affordable rent, people are more likely to stick with you when the market turns.

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

On the contrary, if you’re a jerk and tenants are just renting from you because you were the only option at the time, they’re going to bolt the moment they can. Focus on building a strong reputation now so that you’re better equipped to survive a potential crash.

3. Be realistic with cash flow numbers.

When purchasing a new property, it doesn’t do anyone any favors to plug in vague numbers to determine monthly cash flow. Be conservative and honest.

“You should sit down at the computer, open a spreadsheet, and factor in all your expenses,” real estate investor Jason Hanson says. “What is insurance going to cost? Is there an HOA fee on the house? Are you getting a home warranty? You want to know down to the penny what your cash flow will be on a property.”

When the market does eventually take a downturn and rental rates decrease, you’ll at least know that you have some play in your numbers. On the other hand, if you were liberal with your computations, you’ll find yourself underwater in very little time.

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4. Pay down mortgages when possible.

There’s always the question of whether it makes more sense to pay down on an existing mortgage or put that money into a new piece of real estate. While there are schools of thought that apply to both, consider paying down rental property mortgages when you can. This gives you some leverage if the market crashes and you have difficulty making payments.

Related: The Best and Worst Markets for Residential Real Estate Investors, 2016

Never Put All of Your Eggs in the Same Basket

At the end of the day, financial diversification is your friend. Real estate may be one of the more stable and appreciation-friendly investments you can make, but don’t put everything you have into real estate. Spread yourself out a bit and diversify as much as possible. This mitigates your risk and provides more tolerance in a down market.

Investors: Anything you’d add to this list?

Let’s talk in the comments section below!

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

10 Comments

  1. chuck w.

    In 2006 I started selling off properties I had on the central coast of California. All my real estate agent friends said I was going to miss out on more appreciation, because “property never goes down in California” Ha what a joke !

  2. Peter Mckernan

    Perfect article to combat some of the challenges of land lording and when faced with a bad market, whatever you feel is a good place to put some cash for when the market crashes (i.e. stocks, IRA, 401K, Bonds) it is good to be spread out a little bit (that’s just me).

    Good job!

  3. Casey Murray

    I think #1 is critical and would expand this to include location. It’s vital to consider which markets your tenants will still live in when the market declines. Thinking about real estate from your tenant’s perspective makes decisions a little easier. Great article, Larry.

  4. Ross Bagley

    I would stay away from paying down mortgages. That turns cash (a liquid asset, useful for all sorts of things) into property equity, usually only available during refi or sale. If you have extra cash on hand, build up your reserve balances to better tolerate higher vacancy rates or the risk of falling rents.

  5. Robert Fyfe

    Good article. I like the strategy of lump sum payments & increasing your payments 10% per year as your cash flow increases over the years. Re-invest 50% of your cash back into improvements in the first 5 years and you will not regret it later on. IE appliances, Fences, Roof , hot water tanks , etc. Just a few thoughts.

  6. Domenick T.

    Thanks Larry. I like to build up a 6 month reserve for each unit. This normally covers major repairs and the usual turnover vacancy but has saved me in times of extended downturns too. I would definitely build a reserve before paying down the mortgage, especially a fixed rate mortgage.

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