Earlier this week on my Instagram (@therealestatedon_) I asked for input on what type of articles I should release this week since we’re all trapped in the house, and I was given a really good one….
HOW TO CAPITALIZE OFF OF A MARKET CRASH.
With everything going on with COVID-19 I’m pretty sure it’s safe to predict that there will be nonideal changes to the real estate market. Knowing this, you should be getting PREPARED, so you don’t have to PANIC. It may sound easier said than done, but I’m proof that it’s possible and it’s worth it.
Back in 2008 when the market crashed a lot of people who were in real estate were affected, so they weren’t able to invest anymore (at that time). Investing became difficult because investors lost a lot of money since the properties, they acquired for X amount were no longer worth that market value. Investing was also more difficult because the market crash caused banks to change their lending criteria, and the new criteria made it a lot tougher for people to get financed. This is what created a buyer’s market, there were a ton of properties for sale but not many people to buy them.
You’re probably wondering why people would decide to sell their homes in the middle of a recession, but the harsh reality is many people could not afford their mortgage payments so the majority of the properties on the market were foreclosures.
Properties that are now worth about $50k - $75k were being sold for $15k -$20k; this is when I took advantage of the market and started investing in real estate. During the 2008 market crash, I was able to acquire about 20 properties throughout Philadelphia. I was able to do so by properly positioning myself.
Everyone has their own blueprint for investing, but here’s what works for me despite the market:
- I DO NOT USE ALL OF MY CASH WHEN PURCHASING A PROPERTY… I USE OTHER’S PEOPLES MONEY (OPM)
- MY GOAL IS TO ALWAYS OWN MY PROPERTIES FREE AND CLEAR
- I MINIMIZE ALL RISK FACTORS
As an investor, I take great pride in protecting myself from the unforeseen, such as changes in the market or tenants not paying rent. I minimize risk factors by not putting all my eggs in one basket …. Or all of my money into one property.
This approach is how I currently have 2 houses on the market, and I’m completely stress-free.
Let’s it breakdown
When I purchased the first property, I only put 20% down + closing cost. For example, the property cost $100k but I only put down $20k. With my Acquisition and Rehab loan, I was able to finance the construction cost which was $50k. Altogether I’m in this property for $150k. Keep in mind, I only put down $20k of my own cash, plus closing cost.
This is a real-life example of how I’m not tying up all of my cash. I do it this way because I’ve learned from other investors’ mistakes.
In the past, especially before 2008, what many investors were doing was putting all of their money into one property. For example, they would have $180k. They would purchase a property for $100k, and then put $80k into the rehab phase. They would literally spend ALL of THEIR CASH. So, when the unforeseen happened and the crash came about, all of their money was tied up. Not to mention the market shifted so much, that when they did rid themselves of the property, they weren’t making all of their money back because the market value changed.
So, if you had to choose which option would you go with:
OPTION 1: Only use a portion of your cash on hand and use your remaining money to continue investing in multiple properties.
OPTION 2: Putting all of your money into ONE property, and risk getting low-balled if you’re desperate to get that property off your hands just so you’ll have some cash.
I have faith you would choose Option 1, and with that option LOANS ARE KEY.
With the loans I acquire from the bank I’m able to make INTEREST ONLY PAYMENTS for a year. I make this payment upfront at the closing table, and it only cost around $3k.
This is how I’m able to minimize the risk factor. My house could literally sit on the market for 12 months and it would not cost me any extra money. I put myself in a position where I can wait out any market changes with MINIMAL RISK. Worst case scenario, I’m unable to sell the property within the year and my loan automatically renews. If this happens, I’ll just pay another interest-only payment of $3k which will keep me risk-free for another 12 months or until I sell the property.
Now with the second house I have on the market, I’m able to be a bit more flexible. I acquired that property for such a cheap price that my goal is to flip it by putting the least amount of money into it as possible. Being that I did get it at such a low cost, if I’m unable to flip it, I can always fix it up and rent it out, and still have a profit margin of $500 a month.
The reality of investing is changes happen, market crashes happen, and you can’t always see it coming so it’s important to conduct all of your business in ways that won’t leave you high and dry if worse comes to worst. My strategy can help you capitalize in a nonideal market, but this same strategy can also keep you from negatively being impacted by unforeseen market shifts. It’s all about using OPM, minimizing risk, and having an overall goal of owning your properties free and clear.