Protecting yourself against real estate market volatility can be a difficult proposition. During certain phases of the real estate market cycle, prices may swing wildly from one extreme to the other. Even experienced real estate investors may feel unsettled by these conditions and may be looking for advice. Learning to handle market volatility is one of the most important skills for the seasoned real estate investor. Stan Bril, the CEO of MCG, shares concrete strategies that you can follow if you want to preserve your investments in difficult times.
Balance Your Portfolio
Stan Bril’s first tip is to balance your portfolio between high-risk, high-reward investments and solid properties that will keep producing money for you even through the most difficult times. This holds true both for real estate investors who want to sell their properties and those who are looking to become landlords.
When you balance your portfolio properly, you will take the necessary risks to grow your money while protecting most of your investment. As with other forms of investment, make riskier moves at the beginning of your career, while you still have plenty of time for your investments to pay off before retirement. As you draw closer to retirement, you will want to make less risky investments to protect your money.
Tenants Matter
Building a relationship with quality tenants is another piece of the puzzle. Perhaps you will want to rent to a new and exciting store or restaurant, but their business model is not as solid as those who have been around longer. You may want to invest in this property as a high-risk investment, or you may be more interested in funding some of their neighbors who are well-established businesses. Turnover costs can be very expensive, and most real estate investors prefer long-term tenants over people who are flashes in the pan.
The same principle holds true in residential real estate. Residential real estate is all about your tenants and the care they bring to the property. Ideally, you will rent to the same family for a number of years. You can avoid making large and costly changes to the property while the same family is renting, and you will be able to make modest increases to their rent over time. With a lower turnover cost, you will be very happy that you chose to rent to an established family with a good credit report and landlord references.
Reserves Are a Must
When you are renting to businesses or families, you need to have a reserve fund in place. This will protect you in case you need to make major repairs to one of your properties or in case a tenant falls on hard times financially and has to be evicted. Eviction presents a major cost for the landlord, and it should be avoided when possible. A lack of success in real estate investment often points to a lack of financial reserves.
Stick to Your Plan
When you are dealing with volatility in the real estate market, it can be tempting to dump all of your investments and to go into another type of security like stocks or mutual funds. Ideally, you will already be diversified, but if you are not, take this opportunity to do so. A good real estate investment plan will include provisions for market swings in either direction. A good quality real estate market advisor will be invaluable in helping you create the best possible plan for your business.
Decide on Your Risk Tolerance
You should keep a close eye on the values and prices of real estate in your local community. You will have to decide how much risk you can tolerate. It makes sense to put some money into high-risk investments, but only you know how much is too much. Playing the markets is not considered wise, as in the case of house flipping. Unless flippers can get their properties turned around extremely quickly and take advantage of the “bubble,” they may find themselves getting the short end of the stick.
Creating the Base for Success
The decisions that you make while your business is solid and secure will lay the foundation for difficult times. When you need to balance your portfolio, keep the risk/reward ratio in mind and be sure that you have carefully thought through all of the potential situations that may arise. It is crucial to keep emotion out of investments of any kind. This can be a problem if you are renting to a family or business that you like but that doesn’t take proper care of your building.
The Emotions Behind Investment
People are wired to feel worse about a loss than they feel happy about a gain. When you are dealing with a volatile market, it is tempting to pull back into a situation where there are fewer risks, but you may be giving up the opportunity to make a great deal of money in a short time. Be careful with your money, but don’t overdo it. Stan Bril recommends that all real estate investors sit down with an advisor to decide whether they have a solid plan for their money and properties. Taking the time to think about your priorities will lead you down the right path when it comes to market volatility.
