Let’s get the bad news out of the way first: most economists think we’re heading into a pretty tough time for the economy. Between ongoing supply chain issues (both from the pandemic and the war in Ukraine), runaway inflation, emerging stagflation, the pandemic’s final spasms (particularly in the massive economy of China) and the Federal Reserve’s vow to raise interest rates to dampen inflation – the economy is facing some headwinds.
Recessions always hit the real estate market. If there’s any good news here, it’s that most experts believe we’ll see a warm market cooling rather than a full correction. But a real estate crash is still a real estate crash. Even if prices plateau, it could disrupt the plans of many potential investors, owners and buyers. We can see many people frantically looking to sell their homes as they try to get ahead of the collapse in demand, and many may be trying to sell without a real estate agent just to save on commission. Some recent buyers, spooked by all the talk of the recession, might even turn around and sell before prices drop, risking a significant tax penalty.
But there’s no reason to overreact, especially if you’re preparing for a downturn. Let’s look at the five best ways to prepare for a stock market crash!
While most experts agree that some sort of market decline or correction is in our future, they also agree that it won’t be as bad as it was in 2008 when millions of people lost their house and the whole economy stagnated. That’s because 2008 was a real bubble, driven by subprime lending. The fall was sudden and dramatic.
The future we are heading towards now will likely be much less extreme. In fact, it is likely to be more of a correction, which would see house prices gradually fall to more normal levels, with an increase in time on the market and slower appreciation in house prices.
Most of the slowdown will likely be concentrated at the high end of the market, where sellers may need to lower list prices if they want to sell. Still, some markets will crash more than others, and many will only see a slight slowdown in demand. Take-out? When the correction comes, don’t panic. It will be a bumpy ride, but it won’t be too difficult.
One of the main reasons everyone thinks a crash or correction is coming is because the Federal Reserve is raising interest rates to fight inflation. One of the surefire consequences of this is that mortgage rates will also rise and borrowing money will become more expensive. Fewer people will be able to qualify for mortgages, and banks will offer fewer.
This means that a buyer with cash will be in an ideal position to rush in and buy when prices are low, with much less competition. Investors who were able to buy in the aftermath of 2008 saw stellar returns over the next decade. If you’re smart, you should follow in their footsteps. Remember to play smart by following proven real estate investment strategies.
If you don’t think you can accumulate enough cash in the short term, a line of credit on your home or on an investment property is a good way to access cash quickly. If you have a good relationship with your bank, they will often set up a line of credit on your property for free. Best of all, you don’t have to pay interest until you withdraw money.
Give yourself more room for error by reducing leverage
When the economy slows, rental demand will fall along with property values. So if you have investment properties that are generating healthy returns right now, it’s very possible that cash flow will become sporadic or even dry up once the economy falters.
If you won’t be able to cover the mortgage payments on your investment rentals if rents drop or disappear, you may want to act now and sell them while the market is still healthy.
Tighten your wallet
Every investor has surprises in their portfolio, whether it’s a seemingly excellent property that’s barely profitable or a seemingly average property that’s highly valued. Now, before a crash or fix happens, it’s time to remove these properties from your books. The least profitable for obvious reasons – when the going gets tough, barely profitable properties will likely tip into unprofitable territory. And for big appreciators, it makes sense to cash in now, before values crash.
You want your portfolio to boil down to strong, high-value, profitable properties in markets that can withstand some economic adversity and have stable cash flow. As long as you have positive cash flow on a property – i.e. it is earning more than it costs to own it – a drop in property value is not that bad. .
Don’t forget the tax strategy
If you sell, you will have to pay capital gains taxes on your appreciation, which will be significant after the previous decade. This is why you should consider using a 1031 exchange to sell your property and reinvest – without having to pay capital gains – in another, higher quality property. If you do this, you will kill two birds with one stone: deferring capital gains and essentially exchanging one investment property for one that is better qualified to weather a downturn in the market.
A potential complication here is that 1031 exchanges require you to complete your trade in a very short period of time (45 days), so it will take careful planning and coordination to be successful in this hot market.
Another tax tip: remember that if you sell your property, you will not only lose the depreciation of that property – one of the most powerful tax deductions available to real estate investors – but you will also have to pay the recovery of depreciation. taxes. Be sure to take this into account when doing your “sell or hold” analysis!
Luke Babich is the co-founder of Clever Real Estate, a real estate education platform committed to helping buyers, sellers and investors make smarter financial decisions. Luke is a licensed realtor in the state of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. Education: BA Hons, Political Science — Stanford University