An economic downturn, or recession, is evident everywhere you look these days. Unemployment claims are skyrocketing, businesses are closing their doors, stocks are in the bear market territory, and the Federal Reserve has lowered rates once again.
Any of these situations alone wouldn’t be enough to cause alarm, but together, they signal a recession. All in all, a recession isn’t a bad thing. In fact, downturns are a natural part of the economic life cycle. If you have a diversified investment plan, it will already take recession into account. That said, there are things you can do to prepare for a recession.
- Have a Financial Plan
If you’ve been dabbling in commercial real estate for a while, you likely remember the huge recession of 2007. While it was mostly the residential housing sector that took a big hit, many multi-family investors also experienced the pinch.
Fluctuating interest rates and lack of funds to finish projects were the biggest contributing factors of the impact on the multi-family sector in 2007. As such, it’s important to begin planning now to weather the next economic downturn.
Now is the perfect time to lock down long-term financing with low-interest rates for the next several years. You can also take advantage of the peak in selling that’s happening at the moment. Getting out of a high-maintenance property in exchange for one with fewer management responsibilities and more consistent cash flow makes perfect sense when a recession is looming on the horizon.
- Know Your Market
As an investor, you need to know and understand your market – even in a strong economy. Knowing what and when to buy ensures the success of your investments and will help you stay profitable in a strong economy. It will also help you weather recessions when they occur.
If you’re new to commercial real estate investing, you should take advantage of the wealth of technology designed to identify strong markets and offer insight into the efficiency of properties. It’s easier than ever to run a cost analysis and get a sense of the psychographics of a target group of people.
- Manage Your Risk
With the recession of 2007, some commercial real estate investors lost big as foreclosures and property damage were common. Unfortunately, many investors learned the hard way that risk management is key to surviving another recession.
Smart investors tamp down their financial, legal, and operational risks. You must prioritize risk management and ensure you have proper insurance coverage. It’s easy to execute a business plan when times are good, but when the market shifts downward, it’s the investors who have planned for it that come out on the other end virtually unscathed.
- Stay Patient
They say patience is a virtue, and in commercial real estate during an economic recession, it just might be the key to riding out the storm. It’s important to be patient and wait it out. Many people make the mistake of thinking a recession is over before it’s over. Once this recession has finally run its course, the real estate industry could see the best buying opportunities it’s seen in more than 30 years.
No one can say whether a recession is imminent or not. If it is, it’s only just beginning, so investors need to stay patient and prepare for what’s to come. It takes an optimist to be successful, but it takes a realist to survive and conquer. It’s hard to say how bad it will be or how long it will last, so follow the suggestions above to prepare for the next recession.