Today, the real estate market is undergoing significant fluctuations. The effect of COVID-19 has had a serious impact on residential real estate in particular, but commercial real estate has not been spared. Dealing with volatility in a real estate portfolio can be challenging, but there are steps you can take to minimize its impact on your properties.
David Ebrahimzadeh explains what you should know about fluctuating real estate markets and gives tips on weathering the storm.
Understanding the Fluctuating Market
The housing market has been fluctuating ever since the beginning of the COVID-19 pandemic. Many people have decided that they do not want to live in a crowded city and have instead moved to a suburb. Millions of people saw their work situation change from in-person to work-from-home, so they suddenly became mobile. People also want to live in larger and more luxurious homes if they can afford to do so. This has driven real estate prices down in major cities and made them skyrocket in many popular suburbs. Other areas of the country have been largely unaffected.
Economists explain this theory by differentiating between the local economy’s variation and the growth rate of the population. Variations in the local economy can cause negative impacts while a growing population can cause positive impacts.
Taking the Long View
Property owners can insulate themselves from the worst effects of real estate market fluctuations by taking a long-term approach to their investments. Of course, there will be times when you will need to unload an underperforming property in advance of the date when you planned to sell it, but you should mostly keep your focus on preserving properties for a long period.
Real estate investors hold properties for two reasons: long-term appreciation and cash flow. It can be emotionally difficult to avoid jumping on every change in the market, but real estate owners can take a hint from retirement investors and hang onto their properties for 20 to 40 years for the maximum returns.
Here are four tips from David Ebrahimzadeh that will help you weather the storm of market fluctuations:
Tip #1: Diversify Your Portfolio
Just like you would diversify your retirement portfolio between high- and low-risk investments, it is necessary to diversify your real estate portfolio as well. Focusing on solid deals will keep most of your money insulated from the wild swings in the market. Risky properties may offer the prospect of high short-term returns, but they could also experience sharp downturns, leading to a loss of money. Stack your portfolio with an acceptable amount of risky investments and solid investments, and you will be able to take healthy market risks while preserving the majority of your money.
Tip #2: Hold Money in Reserve
When the real estate market crashed in 2008, investors lost properties due to a reduction in equity or interest rates. It happened because investors did not have a large enough cash reserve to carry them through the crisis. If you do not have the means to have a cash reserve, perhaps you should not own rental property. A market change may lead to tenants being unable to pay their rent and bring on vacancies since your tenants will move to less-expensive homes. If landlords are running on a slim margin, they may be vulnerable to foreclosure and losing their properties.
Tip #3: Maintain Your Property Well
If your rental properties are well-maintained, you will attract the best tenants. These tenants will probably be less likely to experience career-related disruption to their income, though it can happen to anyone as the COVID-19 pandemic demonstrated. Be sure that you take care of all the minor repairs that your tenants have been asking about.
Tip #4: Analyze the Market
Whether you are looking to buy and hold a property or flip it, you will need to have a solid market analysis at the ready. A market analysis covers the educational, employment, and economic needs of the area as well as an understanding of the housing stock currently built and under construction.
You can access real estate market analysis material by searching local newspapers, national real estate organizations, federal data sources like the Census Bureau and Department of Labor, and online property listing services like Zillow. If you are lucky, you may be able to find a recent real estate analysis for your area online.
Surviving Market Fluctuations
When you keep these tips from David Ebrahimzadeh in mind, you will have an easier time planning your portfolio for the future. Take the long view of the market and be sure to put aside money from monthly rents into a reserve account to cover any unexpected expenses. This can help you avoid foreclosure on your properties if a major economic disruption like a global pandemic occurs.