Posted over 4 years ago

How To Survive In A Falling Market - Protect & Build Your Wealth

How To Survive In A Falling Market

Key Actions To Protect & Build Your Wealth!

The world is being brought to its knees by a global pandemic that no one saw coming, a real black swan event.

As many countries head into social distancing and lockdown protocols, it raises questions over what the global economy will look like when this is all over.

We all know that a dip in the global economy can heavily impact the property market.

At these times, you want to consider your investments and how you might survive in a falling market.

So, let’s explore how you can take a defensive stance, what you should look out for, and how you can position yourself to benefit from any emerging opportunities.

What Causes A Falling Market?

There are two circumstances that can cause a falling market.

A RECESSION: An economic recession is characterized by negative economic growth. A recession is taking place when the GDP (a measure of the value of economic activity within a country) is negative for 3 or more consecutive quarters.

A DEPRESSION: A depression is a severe and long-lasting correction of the economy and asset prices. Generally, they are more extended than a recession and have a negative impact on the value of property.

Right now, we are in a recession period and already we can see an impact on the economy.

Preparing Yourself To Navigate It

In the history of the world, economies have dipped and risen thousands of times. At some point, this recession period will end and the property market will become more certain again. However, we have to make it through this current period to get to that point.

These are some useful questions to ask yourself now:

Can I survive this?
How could I prosper from the situation?
What are my weak points?
Where am I exposed to risk?

Understanding the answers to these questions will help you to create a solid survival strategy. That way, you will be able to navigate this falling market.

There are solutions that allow you to remain afloat. For example, if you have good assets with a lot of equity but poor cashflow, you may consider selling some. This tactic will reduce your debt and strengthen your cashflow.

The main thing you want to do is to avoid a forced sale. Be proactive and act early. Like good old Warren Buffet would say…

Rule #1: Don’t lose money (that means protecting your capital!)

Rule #2: Remember rule number one!

How To Be Defensive

In a falling market, you don’t want to wait for things to simply happen. That would leave the fate of your portfolio up in the air. So, it is important to develop a defensive strategy to protect your assets.

Here’s what you can do:

Lock in your rates for a long period to create repayment certainty or consider extending your Interest Only period
Speak to a Mortgage Broker about what your options might be
Consider refinancing current assets for better terms, longer amortization periods, and lower rates. Lock them in for a long period if you can
Establish your lines of credit now while your finances are still healthy
Set up a default reserve account
Have 8-12 months of living expenses in reserve
Have Liquidity - cash is king!
Sell any underperforming assets
Don’t put all of your eggs in one basket, ensure you diversify the lenders you use
Establish longer commercial leases: with 8-12 month renewal notices

Consider Agency Financing

In a falling market, Forbearance Agreements are a common solution. It is something that you can discuss with your lender to help you ride out the current period.

A Forbearance Agreement is when your lender agrees to reduce or suspend your loan payments for a set amount of time. After the agreed period, your lender will temporarily increase your monthly payments by adding a portion of the overdue amount so that you get caught up on what you owe.

While this provides a solution in the here and now, it is important to remember:

You will need to repay overdue amounts within 12 months
You cannot evict within the Forbearance timeframe
Approval of such an agreement is dependent on your financial and cash position
You will need to prepare: T12, Rent Roll and a Balance Sheet

It is important to keep your equity relationships so that you are able to raise money and put together a deal. If you are running a Syndicate, it is also important to share and communicate regularly with your limited partner.

Handling Asset Management

In terms of your asset management, things might change in the coming months. Here’s what you can potentially expect:

From May onwards, you may see up to a 30% decline in income as a result of economic occupancy
There may be higher delinquencies
Up to 20% unemployment
Move-ins may be cancelled and there will be low traffic
Current residents may downgrade or move in with family

All of this can result in more vacancies, which means a drop in rental income, the need for concessions and a low Net Operating Income (NOI).

Focus On Resident Retention

At a time when people are forced to move due to their finances, it is vital to focus on resident retention. Here are some things you can do to maintain good relationships:

Don’t implement rent increases
Don’t charge late fees
You are unable to file evictions
Offer payment plans: defer payment for one month and spread the balance over a 12 month period
Offer incentives: if tenants pay on the 1st of the month they receive a 20% discount, pay by the 10th and get a 10% discount etc.
Provide an incentive with lock-in renewals: give people a reason to stay and pay rent - such as $100 off their first month’s rent or a $50 Amazon credit
Use this time to improve your marketing - consider Facebook, Google Ads and your website
Provide video tours of apartments to maintain social distancing
Offer digital document signing via Hello Sign or DocuSign

Hunker Down

Now is not the time to splurge cash. You want to hunker down and protect your financial position. Here are some ways you can do that:

Start reducing your expenses
Focus on capital preservation
Stop asset management fees for your tenants
Have weekly calls with your Property Manager for an update on the property
Order standard maintenance supplies to have on hand - electrical parts, plumbing supplies, replacement locks etc.
Delay any non-urgent maintenance jobs - only address urgent jobs for essentials like water overflow, electrics and HVAC
Close the swimming pool and gym to reduce expenses and increase tenant safety from virus transmission

Not only will these things protect your financial position, but it will help to maintain a happy, healthy living environment for your tenants.

"In The Middle Of Difficulty Lies Opportunity"

Even though the market is falling, there will be opportunities out there. You will want to carefully consider any deal before making a decision.

These are the things to think about when buying deals in a shaky market:

Ensure you underwrite conservatively
Remember that T12 and Recent Actuals no longer apply as the market has shifted
The next 24 months could be very different from the previous 2 years
There will be higher vacancy rates, no possibility of rent increases and rent decrees
Work out what your breakeven point is
Because the risk is higher in a shaky market, there will be more reserves payable on closing
Buy slow - take your time to do thorough due diligence (remember it can take longer in a falling market)
Seller financing could be an option

Where to from here?

In this emerging situation, things are somewhat uncertain. So, you want to make sure you stay aware of the current market. Look out for trends, see what is happening in the news, monitor what lenders and brokers are up to, plus keep an eye on vacancy rates and how long properties are taking to sell.

A falling market can be an unsettling time for investors. But, as we mentioned earlier, this period in time will end. The market will rejuvenate. We just aren’t sure when that will happen at this point.

So, you need to position yourself for your best chance of success, keep positive, surround yourself with like minded people & Make It Happen!