5 Things You Can Do To Protect Yourself From The Unexpected
If you are in the real estate business, you would understand that it is constantly changing. This has been going on for the last decade or so. Your business could be going great one second and the next things can feel like they are falling apart. The best way to protect yourself when the floor drops out from under you is to prepare yourself for the unexpected. When you understand that something can go wrong at any second, you will be able to make smart, quick decisions to try to make things better. Nobody wants to be negative and to expect the worst, however, when you do, you can handle just about anything. Below is a list of 5 things you can do to protect yourself from the unexpected.
Understand Exit Strategies
Even before you make an offer on a property, you should have an exit strategy in mind. If you have been in the real estate business for a while, you understand that things can happen that would require you to switch gears very quickly. If you are new to the business, you will find this out very quickly. This is where you need to use your exit strategies. If you have a rental property and you need to sell it quickly, you should have an idea of what similar properties in your area are selling for and what is the lowest price you could sell for. The same is true if you are working on a rehab property. If something comes up, you should know what you can do to fix them. Each day you go without taking any action can cost you money. Also, time will make the problem worse. Before you get involved with any property or any deal, it is important that you know what your exit strategy will be.
Increased Cash Flow Rentals
If you are new to the real estate investing you should know that numbers never lie. It is important to pay attention to them. If you are looking at a rental property that will take all of your cash just to break even, it could be a recipe for disaster. The best way to avoid this is to only buy properties with a good amount of cash flow. This extra cash will give you some wiggle room. If you need to lower the rent to avoid a vacancy, you would be able to. It will also protect you if another one of your properties isn’t giving you as much of a return as you had hoped. When you have a good amount of cash flow from your property, you will be able to make the best decisions for the long term and you can manage the property properly. This extra cash flow will also allow you to wait for the best tenants rather than renting to someone who has red flags just because you need the cash. Something as simple as an increase in your insurance cost going up or your property tax increasing can create problems with all of your other projects. If you have an increased cash flow, you will be able to handle any financial issue that comes up.
Have Multiple Lead Sources
If you use just one lead source, it can result in a problem at some point. A certain source could be producing plenty of leads one day and then have nothing the next. This can result in you losing money and having nothing at all to show for it. The real estate business is just like any other business. It is important to diversify. The same is true with the types of properties that you buy. You can start with a few forecloses and maybe a short sale, however, you should have a few probate leads in there as well. The area where your leads are coming from is also important. It may sound like a great idea to own five houses on the same street, however, if the market changes, you could be in serious trouble. It is best to mix things up just in case anything were to happen.
Equity
Having exit strategies is one thing, but being able to put them into effect is another. You may know the exact number that you can sell your property for if you are in trouble, however, does the market justify the number that you came up with? It is best with any property that you intend to keep in your portfolio long term to make sure that you are always boosting the equity. You can do this in a few ways. The first thing that you should do is make improvements and upgrades. While this can be helpful, it does have a downside. The work that you do on your properties today may not have much value in 5 years. If you do the right work for the market and the property, the work you do will boost your equity. If you pay down the loan balance, you can also boost your equity. To do this, simply make your regular payments and then add two additional payments each year. If you have a 30-year mortgage and you double up on one payment, you can take 12 years off of your balance. Even if you don’t intend to hold the property for that long, reducing the balance will allow you to refinance or sell if something unexpected happens.
Reserves
The best way to prepare for disaster is to have capital reserves. This will allow you to pay for unexpected maintenance problems or a sudden vacancy in a rental property. Reserves can also help you get through an extended gap between closings. It can also pay for leads to growing your pipeline. During the mortgage collapse, real estate investors suffered not because of the rise in interest rates or the rise in the prices of homes, it was because they didn’t have enough reserves. If you have reserves, you will have the money that you need and the money to wait it out until things get better.
In any business, there will always be situations that are out of your control. This is also true in the real estate business. If you use the 5 tips listed above, you will be prepared for whatever happens.