Let’s face it – the Stock Market is really not for the faint of heart, especially in times like these!
Recent news and the ongoing economic uncertainty have been causing some pretty wild rides and sometimes it feels like you’re just hanging on for dear life. It can be a pretty scary place, even for the most seasoned and experienced day traders.
But without the downs, you can’t have the ups. Without the ups, you can’t have the downs. It doesn’t matter which side you’re betting on; without movement there is little potential for profit. For those players who can keep their cool during this time of fear and panic, there is money to be made.
The same essentially holds true for Real Estate. Investors want to see the real estate markets cycle because that is when real opportunities happen. Remember the old adage, ‘Buy Low – Sell High’? It’s hard to buy low if the market is always up!
In most situations, movement means change, and change creates motivation. Sometimes perfectly good assets and real estate must be sold because of a death, divorce, partnership dissolution, retirement, downsize, loan maturity, interest rate adjustment, etc. Sometimes the owner has simply accomplished his goal and is exercising his exit strategy to realize a profit. Sometimes the owner has just not managed the asset well. Whatever the motivation, if you aren’t expecting the change or if you aren’t properly prepared, your hand could be forced sooner than you’d like or under less-than-ideal circumstances.
Fortunately, the Real Estate markets tend to move at a much slower pace than the breakneck, minute-to-minute rollercoaster of the stock market. For those who are looking (and who actually want to see!) it’s usually a lot easier to anticipate market movement or upcoming changes and then have time to plan and prepare accordingly. For example, information and statistics are available that show another wave of mortgages with interest rates re-setting coming up over the next few years. That could spell disaster for those owners who don’t start working on a plan to resolve the issue but it can also spell opportunity for investors who start positioning now to be ready to purchase if and when some people are forced to sell.
Ideally, owners and investors will plan and prepare to be in a position to minimize losses or to take advantage of upcoming opportunities when movements happen. Understanding your investment and the things that can affect its value are the keys to making smart investment decisions.
Smart investors are proactive, not reactive. They constantly monitor their holdings and make strategic moves to protect overall value – hedging their bets, so to speak. That way, if something changes or it the market moves in the opposite direction than what they think, the portfolio’s principal value is still largely protected. Whether it’s a stock, real estate or other asset class, every investment asset needs to be actively monitored and managed, even the passive ones. (Note: Property Management is not the same as Asset Management!)
In Real Estate, hedging or protecting your principal is often as simple as having ample cash reserves to weather through a rough spell of unexpected vacancy or repairs. The only time you really need to worry about the value of real estate is when you go to sell. Adequate liquidity can usually help you smoothly ride out a down cycle so you aren’t forced to sell at an inopportune time.
As many investors have recently discovered, a Home Equity Line of Credit (HELOC) is a poor and unreliable substitute for an actual cash reserve account. A HELOC can and will be revoked or capped by the lender at any given moment, regardless of spotless credit or payment history.
Many real estate owners make the mistake of cannibalizing their investment by draining every drop of the operating cash flow or overleveraging the asset. Then, when something unexpected comes up or something changes, they blame the market or the real estate itself for a problem that they created by not carrying sufficient reserves. You WILL have tenant changes, you WILL have some repairs – these are eventualities that can and should be planned for by all real estate owners.
Bottom line: Know your assets, know your investments, keep your eyes open and plan ahead. These market movements are creating a lot of opportunity and it doesn’t look like it’s ending any time soon. Batten down the hatches of your solid performers to ride out the turbulence, cut loose the dead-weights and position yourself to take advantage of the opportunities created by these market movements.