The recession is officially here and for owners in the Central Valley, and across the United States, that means changes are coming but thankfully owners can protect their investments by going the following:
1. Keep Low to Moderate Debt Levels
It probably goes without saying that those with no or moderate debt will be less affected by interest rate increases or economic downturns. Investors who depend on low-interest rates to make their numbers work may find themselves in trouble during a higher interest rate environment.
In the event of a drop in value, it’s possible that over-leveraged investors will experience a loss of equity or even negative equity, meaning the reduction in value will cancel out their gains and even their original cash outlay. As a syndicator, this could result in a capital call from already unhappy investors.
This can also hurt during refinancing. Economic troughs also kindle tight credit markets. Banks raise their lending standards, lower their loan-to-cost ratios, and generally become harder to borrow from. This can also lead to negative equity and the potential to lose an excellent cash-flowing asset.
Over-leveraging can turn a low-risk investment into risky speculation. Investors beware.
2. Use Fixed-Rate, Long-Term Debt
This goes hand-in-hand with the first strategy. We may be heading into a downturn. But that direction will eventually turn north again. Though timing will vary, it’s likely that investors with long-term, fixed-rate debt will ride the cycle through the trough and up the other side. And rent inflation will likely continue to raise revenues during this entire cycle, creating excellent cash flow and value for these investors.
It’s okay to utilize short-term, adjustable-rate debt. There’s certainly a place for it. But if you’re concerned about our position in the current economic cycle, carefully consider the structure of your debt.
3. Buy Off-Market When Possible, And Don’t Overpay
We discussed the importance of not overpaying in the prior article. With the massive number of investors competing for a finite number of deals over the last decade, it may be tempting to jump on any deal you can get as this market loosens.
With the market at a historical top, overpaying right now creates the highest risk at the worst possible time. Margins of safety are at perhaps an all-time low, and this is the time to be prudent. One way to do that is to buy off-market.
Real estate investors with a robust off-market acquisition strategy will find deals with lower buyer competition and likely at better prices.
There are a variety of ways to find off-market deals. Much depends on your asset class and team capabilities. My firm invests in recession-resistant commercial real estate with top operators. My favorite operator has a team of eight working full-time to contact off-market self-storage and mobile home park owners. This strategy has produced stunning results over many years.
One tactic to boost this effort is to carry significant cash reserves. Those who can buy for cash and refinance later may access deals and prices unavailable to many other investors.
Buying favorably priced off-market deals often coincides with my favorite wise investment strategy, which you can predictably count on in any market or economic cycle.
Hire A Property Manager
One of the most important things to do during a recession is to hire a property manager.
At RPM Central Valley, we have decades of combined experience and this means you can have peace of mind in knowing that your rental properties are generating the most ROI possible.
To learn more about our property management services, contact us today at (209) 572-2222 or click here to connect with us online.