Market downturns cannot be avoided. They are a cyclical inevitability in real estate, and in financial markets more broadly. The question is, are you preparing yourself now for the next downturn, and how do you run your real estate investing business amidst recessionary times?
Whether or not a full-blown recession is coming, if you adequately prepare and carry yourself through a downturn, investors can better protect, grow, and scale their portfolios. Here's an overview of how real estate investors can maintain their business momentum during downturns and the specific actions to take when experiencing difficult economic times.
There are two types of education: academic and practical. Both are critical for real estate investors. When times are tough and you may not be as active as before acquiring new assets, you have the time to launch into education that will help elevate your investing business.
This can be professional certification such as a Realtor or broker licenses, or you can take online courses through a real estate investing or coaching program. Many of the resources out there are free, including from top universities. Consider some of the free material provided by the Massachusetts Institute of Technology (MIT) on the following courses:
- E-Commerce and the Internet in Real Estate and Construction
- Real Estate Finance and Investment
- Real Estate Capital Markets
- Real Estate Economics
- Advanced Topics in Real Estate Finance
- Legal Aspects of Property and Land Use
- New Century Cities: Real Estate, Digital Technology, and Design
- Tools for Analysis: Design for Real Estate and Infrastructure Development
Or, Yale University offers some advanced economics courses free online as well. Property technology firms have also published a wealth of information that investors can digest, such as Zillow. And never forget the power of YouTube.
When it comes to practical education, it never hurts to reach out to those who are at the level you want to be, to offer your services for free. Propose you take over temporarily some aspect of their business so you can "learn the ropes" or ask if they offer coaching. The idea here is to provide as much value to them as possible in exchange for some practical experience and education.
Just because you may not be in acquisition mode doesn't mean you stop analyzing. In fact, you should be making deal analysis a part of your daily routine to better hone your skills. Developing proformas and back-of-the-napkin cap rate and NOI analysis is the bread and butter of any real estate investor's business.
Double down on this activity. If you run out of deals to analyze, expand your location to other towns and cities that fit your investment criteria. This is not to say you'll acquire these properties, but you should give yourself a chance to see firsthand how the market reacts to a downturn and how that affects your real estate investing metrics.
As you are educating yourself and analyzing deals on a daily basis -- even if you're not buying them -- it's time to build your personal brand. As you grow and scale your investing business, you want to be the one people come to for advice and guidance. You also want people who want to passively invest in real estate to come to you with their questions.
To achieve this, you have to become the local expert. This means being visible and providing value to your audience on a daily basis. You're already reviewing deals and you understand the local economics, so why not share that wisdom? You can do this by creating a blog, a newsletter, a podcast, or even reaching out to local media to see if there's an opportunity for commentary on local real estate matters.
Real estate investors can and should be marketers as well, so start building your brand.
Real estate investing is a team sport. You may start out as a solo entrepreneur, but you will soon realize that you need a team around you in order to make proper investment and management decisions. Part of building your team is networking.
Attend local meetups, or better yet, form your own (see branding point noted above). Find out ways to mingle and share ideas with entrepreneurs involved in real estate in your locality. Travel for conferences and meetups if necessary.
There's one thing that kills real estate investors during a downturn: liquidity. If you are at the end of a productive economic cycle and are expecting a downturn, it's time to think about your liquidity. Remember, real estate markets are cyclical, a downturn is always somewhere on the horizon.
Here is the trifecta of factors that contribute to real estate investors going out of business during a downturn:
- Overpaid for a property
- Poor tenant profile and communication (leads to vacancy)
- Poor cash flows (little cash on hand)
This is where real estate investors get into trouble. So make sure you address all of these factors as a matter of everyday practice in your investing business.
Consider refinancing scenarios ahead of a recessionary cycle to keep some cash on hand for extended vacancy or distressed opportunities from other investors who may need to liquidate assets.
The bottom line
Real estate investors aren't helpless, but it requires planning beforehand and doubling down on best business practices when a downturn hits. Maintaining momentum during these down markets is tough. But you can come out on top with a healthy mix of education, ongoing analysis, branding, networking, and creating liquidity in your business.
Use the time during a downturn to take a close, hard look at your investing business. Build up your knowledge and profile, because as the saying goes, "your network is your net worth." Use the tactics listed above to help build your long-term net worth.