As Warren Buffet said, “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
The financial markets are in distress. Stock market values are down significantly year to date. Cryptocurrency values are down even more. Everyone is talking about how stressful times are with gas and food prices so high.
In times like these, investors are wise to include hard assets in their investment portfolio, because they typically hold sustained value during the most turbulent markets.
Real estate, especially residential real estate, whether single- or multifamily, is one of the most tried-and-true investment vehicles. Housing is a basic human need, after all. When 100% of the popu-lation needs—not wants—your asset, there is significant pricing and staying power.
Even though real estate holds intrinsic value, we still need to be vigilant in how we invest, so we don’t lose money.
Here are four considerations for protecting your investment even in recessionary times.
1. Maintain a Healthy Level of Liquidity
Investors and business owners are at risk of losing their investment when they run out of cash or liquidity to pay their necessary expenses and debt payments. You could have the best investment in the world, but if you don’t have enough cash in the bank to sustain operations during a few turbulent months, you’ll be in trouble.
Strive to maintain a “safety net” of at least 6-12 months for your personal expenses in cash or a similarly liquid (easily convertible to cash) account like a line of credit. And aim for enough cash or liquidity to maintain 3-12 months of expenses for each of your businesses and real estate investments. If you can do that, you won’t need to worry if you face a situation like what happened in March 2020, when income was delayed for a while. Instead, you can calmly assess the situation and make the necessary adjustments because you have a safety net in place.
2. Strengthen Operations
A lot of money has been printed during the last two years, causing asset values to rise extremely fast. At times, the values rose much faster than the cashflow the assets provided. Unfortunately, that has caused some newer investors to think values just continue to go up and that’s how you make money investing. More experienced investors know that the most stable source of income from real estate is it’s cashflow.
Cashflow ultimately comes from having strong and sound operations. What systems and processes do you use for your properties? Do you have an efficient system for leasing units? How about your system for turning units between one resident to the next?
These seemingly boring day-to-day questions are what makes or breaks your cashflow.
Make sure to tighten and strengthen operations right now, so even if the economy gets a little worse, you are well-positioned to capture all the income you can.
3. Invest in Areas with Population Growth and Job Growth
Real estate prices and rent prices are affected by supply and demand. The more demand for rental housing, the higher rent goes. With many would-be homebuyers getting pushed out of the market due to high interest rates, the demand for rent has increased. This is especially true in areas with population growth and job growth.
Real Estate is local. In the U.S. where there is negative population growth and job growth, rent prices stagnate and can decrease. This is because the supply of housing exceeds demand when there aren’t enough people moving to an area. Home prices also stagnate and decrease in those areas. But in areas with strong population growth and job growth, demand continues to grow—and supply can only grow so much. Investing in these strong population and job growth areas will help protect your investment.
4. Invest for Cashflow and Count Appreciation as a Bonus
We are in turbulent and unprecedented times. Yes, we know real estate is a basic human need, so there is always demand. And we also know demand far exceeds supply. But no one has a crystal ball that reveals exactly how real estate values are going to play out.
That’s why it’s important to invest in real estate that can cashflow, so at the very least it can pay for its own expenses and debt payments to weather any economic storm or recession.
Recessions come and go. If we position ourselves with enough liquidity and cash flow to survive the hardest economic times, then at the other side of that pain is a lot of opportunity. Unfortunately, many investors who do not have liquidity and are investing simply for appreciation (that may not come soon enough) will be forced to sell their assets prematurely; otherwise, lenders will take those assets back.
If you can survive a rough economy, you will have your pick of the best real estate when we emerge on the other side.
Arianne Lemire is a former speech language pathologist turned real estate investor who has rehabbed and wholesaled more than 500 single-family properties. She has ownership in more than 2,000 multifamily rental units in the Southeast with partner investors.
Her financial freedom has allowed her to travel several months a year to spend time with friends and family. During her travels, she realized she wanted to share that freedom with others. As a result, she launched WealthGym, a community that helps busy professionals create time and financial freedom so they can retire within a few years.
Lemire spends her free time at her “Ask Arianne” YouTube channel, where she creates free educational videos on money, investing, and real estate to inspire others to achieve financial freedom early.
You can reach Lemire at www.wealthgym.com, www.youtube.com/AskArianne, or https://www.instagram.com/theariannelemire.