We’ve all seen the signs pointing toward an economic downturn. No one wants to be caught unprepared like so many investors and real estate owners were when the last big recession hit in 2008.
So, with a recession likely around the corner, what do you need to do as a real estate owner? Can real estate owners learn from past mistakes and set themselves up to succeed? Yes! Read on to hear our thoughts on managing real estate in a recession. There are several smart moves owners can take to recession-proof or manage through a recession.
Is a Recession Coming?
Our economy is cyclical. We have times when the economy is growing followed by times when the economy contracts. Since we’ve been in a period of growth for the last several years, a recession will eventually come, whether it’s next year or five years from now.
As we’ve recently experienced an inverted yield curve, many people believe that a recession is imminent. Others point towards the ongoing trade wars. There are also other signs pointing toward a possible 2020 downturn. But is a recession really coming? After all, people have predicted recessions plenty of times before, and they don’t always happen.
We wish there was an easy answer here, but unfortunately, it’s not possible to predict a recession with certainty. We also don’t know whether the next recession will be mild or severe. All we can do is remain prepared for the possibility.
Are You Prepared for Managing Real Estate in a Recession?
Many real estate owners, investors, and landlords don’t know what to do in the case of a recession. As a real estate owner and investor, here are some ways you can stay prepared.
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Know that Lenders May Tighten Credit Standards
Banks do not want to take on risk in the midst of a recession. When a downturn seems imminent, they will tighten their credit standards. This could make it difficult to grow your real estate portfolio. Along the same lines, you probably shouldn’t be growing your portfolio unless you have reserves. You may not be able to count on future income if a recession hits. Your CPA can give you good advice tailored to your situation to manage your portfolio through the recession.
Know That There May Be Less Demand
As a result of having less demand, you won’t be able to raise rents as much. Old tenants might leave, and it may become difficult to find new tenants who are willing and able to pay what you’re asking. Note that this depends greatly on the severity of the recession and the demand in your location. Keep the communication channels open with existing tenants so you know how they are doing. You may want to begin lease renewal conversations earlier to lock in the renewals.
Look for Creative Ways to Fill Vacant Space
You know those vacant retail or office spaces you have? Managing real estate in a recession means looking for creative ways to fill those spaces even if it is a short-term lease. Other longer-term options are to fill the space with tenants that are doing well even in a recession. With an aging population, the medical support field is a strong candidate. Medical office space is expected to grow by 20% over the next 5 years. Could your space be retro-fitted to support medical office space?
Work Now to Build Equity
If you can afford to make slightly higher payments on mortgages right now, you can be prepared to take a hit in the future. While you’ll be spending more money in the short term, you’re not losing the money— because you’re building equity and setting yourself up to grow your portfolio in the long run.
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Know Your Operating Expenses
This is the key to solving all your recession-related problems! It doesn’t matter whether a recession is right around the corner or several years away: you need to meticulously track your operating expenses. This includes maintenance, property tax, mortgages, etc. This allows you to plan ahead for exactly how many units need to be occupied and how much you need to earn in order to keep your business afloat—no matter what happens. This also means ruthlessly questioning each expense and making sure they all make sense and you are receiving the service at a fair price. And, take the time to evaluate your property taxes and appeal them if necessary.
What Tools and Strategies Can Help?
To be prepared for a recession, you need to know your numbers. It’s crucial to know if your portfolio is experiencing losses so you can fix issues as they emerge.
Real estate management software such as STRATAFOLIO can be a valuable asset when you need to carefully monitor and manage your portfolio. Set up a free consultation and demo today! We’ll discuss managing real estate in a recession and help you discover whether STRATAFOLIO is the right tool for your business.
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