Home prices today are significantly higher than normal, regardless of the appraisals and the current condition of the property. The demand is now surpassing the supply and people are thinking, are we in a “bubble?” There are some areas of the real estate industry that makes us think: possibly. However, as long as people are able to afford their payments, it will take an external event for a real estate downturn, and that may include an overall recession or a job market hit.
But if there is a real estate downturn, how can you prepare your company?
You should have an emergency fund in case anything goes wrong - whether it’s a company-wide problem or an industry downturn. You can start building your emergency fund by forgoing owner distributions.
Check your loan and if it’s due in a couple or even a year, you should extend it for at least five years. This gives you ample time to breathe. If you also haven’t refinanced in the last few years, this could save you money since your interest rate will likely go down.
While you have the cash and while you have the means to get the cash, you should start upgrading or renovating your properties. By the time downturn comes and you’re all out of cash, it will be much harder for you to even fix a faulty pipe or replace an old window or roof.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It’s a secret method that wise investor use over the years. Basically, this is the order of your investment procedure. When done right, the BRRRR method allows you to purchase a property with zero money down.
When you purchase a home traditionally, you have to put a heavy down payment as well as money for the rehab and closing costs. The total sum you put down will be the investment basis that will be used for your ROI calculation.
If the market crashes, you won’t have that total sum to invest in the down market. Your opportunity cost, in turn, will be high.
How can you overcome this? Remove the opportunity cost. If you buy a property and gain back the capital you spent, you’ll be able to buy more. The BRRRR method allows you to do this.
For example, you bought a property for $60,000 with a rehab cost of $40,000. If you put a $5,000 for the closing cost, you would’ve spent a total of $105,000. However, once it was rehabbed and rented out, the property could appraise to $135,000. You can refinance it and recover $101,250 at a 75% loan-to-value ratio.
This will mean you’ve basically left only $3,750 on your property - significantly less than the initial investment you’d put in a traditional model.
This gives you the opportunity to put that money into the next property if the market does crash.
The future remains unseen but what’s the best plan to survive but to be prepared? It doesn’t do any damage to your company. In fact, the methods aforementioned could benefit it. So, don’t wait for the next downturn to make a move.