This past year was an extremely trying one for many investors – myself included. I was very happy to see the end of 2016. This has been one of the reasons that my blogging has been spotty the past few months – I have been putting out fires all over. Extended low oil prices mixed with questionable government leadership have led to very high vacancy and lower rents in the area that I invest in.
High vacancy and lower rents are not a great combination. This leads to low (or even negative) cash flow. An extended recession can really test your abilities, your resolve and your cash reserves. As you sit in the corner in the fetal position, sucking your thumb and rocking back and forth, it can even make you question your sanity for getting into real estate investing in the first place.
A couple of things have been made clear to me this year. First, the importance of having some savings and keeping money off to the side and second, the realization (or maybe more appropriately said, the reaffirmation) that real estate investing is a long term game.
Savings are critical to your success. I have written before about how I used to always invest any extra money that I had. I felt that all of my money had to be out working for me. Over the past couple of years I changed that strategy to have more of my investment money unused. I started to do more Joint Venture partnerships and make sure my existing properties were in good shape before I bought something new. I am really glad I did that. Having some savings allowed me to deal with the downturn in the economy without missing mortgage payments. (review a previous blog at: http://www.sabanabooks.com/managing-money-is-one-of-the-keys-to-real-estate-investing/ )
I would also strongly advise that you and / or your spouse continue working if one of you decides to start investing full time. You need regular cash coming in to make sure your personal expenses (food, mortgage / rent, insurance, transportation etc.) can still get paid if you end up with some temporarily negative cash flow from your investments.
When times are good and you are making good profit on your investments make sure to sock some of it away for those lean periods. I am glad I did that too. Perhaps it is the natural aging process but I found myself getting more and more conservative in my approach over the past few years. Gone are the run and gun, no holds barred investing of my youth. My new, calmer approach really helps in a recession.
I noticed as well that there is a ‘flight to quality’ in a recession. Tenants will search out the nicest place they can afford when rents in every building in a market start to go down. A newly built, nicely appointed property that rented for $2,500 last year and is now going for $1,600 will attract those renters who are still employed and have been paying $1,600 for a so – so building. The moral is to keep your places as nice as possible and treat your customers well all of the time.
During this difficult year, as I was digging into savings to pay some property costs, I never lost the long term vision of real estate investing. I had purchased my buildings at lower than fair market values, fixed them up, raised the rents and got good tenants in place during the good times. The lowering of rents (that usually happens due to the higher supply and lower demand of a recession) started from these new higher rents – that helped a lot. That is way better than lowering already low rents.
Recessions always end, however, so I realize that rents will come back up, vacancies will go down, equity build up will continue and resale values will return. Your long term wealth management is secure in real estate. The trick is to stay afloat long enough to see good days return. The key to that is proper cash management and having savings to see you through the rough patch.
Read more about this topic in Cash Management in Real Estate Investing.