What Happens to Your Commercial Property During a Downturn?
Benjamin Franklin once said that there are no guarantees in life other than death and taxes but I believe we can also add a downturn in the real estate cycle to that list.
Having been in the real estate business for over three decades I’ve experienced first-hand multiple cycles in the market. During these phases I’ve noticed a trend, people who operate their properties with a strong management team typically forecast the market turning and prepare in advance.
The market you’re in will have a lot to do with how properties are effected, Los Angeles and a few other major metro areas typically only see a drop in value of a few percentage points while other areas can take a bigger hit.
Know your market prior to making an investment and NEVER make an emotional investment that your numbers cannot support.
During a real estate market downturn, real estate investment businesses which are equipped financially have a better chance of surviving and avoiding bankruptcy. If you’re going to be a successful real estate investor, you need to learn to budget for downturns and difficult times.
Here are some tips to help you succeed.
1. Consider extending your loan term now-it’s easier to refinance with your peak cash flow.
2. Conduct cost benefit analysis to keep your expenses in check.
3. Have an emergency fund/reserves to cover unexpected expenses or clients that cannot meet their lease payments.
4. If you own a commercial property with multiple leases coming up at the same time you may want to renew their lease early at a rate that works best for both of you.
5. Find Your Break-Even Point- Based on your current rent roll and operating expenses, what vacancy rate will result in the property’s monthly cash flow equaling the mortgage payment? Know your number and protect your break even point.
6. If you have multifamily assets you should look for additional revenue sources for your property ie: accent walls, rent storage space or carports.
7. Keep your tenants happy, a tenant that moves out is not just lost rental income, it also means leasing expenses, make ready costs, etc…
8. Completes big repairs and upgrades before the downturn.
Typically, a downturn is not felt evenly across all locations or property types.
The properties that will see the most fluctuation are those that are already out of favor, as well as those properties located in areas of low population growth.
High growth markets and popular property types will still feel the downturn, but not to the magnitude these other properties will.
Finally, remember that in fluctuating or uncertain economic times, do not buy on speculation, but rather for cash flow.