It may seem hard to believe, but the mortgage meltdown is approaching its fifth anniversary this fall. For some, it may feel like only yesterday, and for others it feels like a lifetime ago. Regardless of your particular sentiment, we have become familiar with short sales and deficiency judgments. In the five years since, we have seen the rise and decline of foreclosures and home values. Five years may seem like forever in your business, but it was just enough time to take away a few lessons from the past.
One of the first things the mortgage meltdown taught us was to avoid spreading yourself too thin. There is nothing wrong with having an expansive portfolio, but you need to protect each property. Ample reserves must be in place, in addition to a defined exit strategy, for the worst case scenario. The common belief was that adjustable rates were the catalyst for the collapse, but many investors will tell you it was the lack of equity in addition to the lack of reserves. Once tenants stopped paying, many investors did not have sufficient funds to cover a few months of payments. Six months later, many their portfolios were being foreclosed and their investing careers changed dramatically. The importance of reserves cannot be understated.
You can have the best rental property with the best numbers, but if your tenant doesn’t pay, it is all for naught. Having a signed lease does not guarantee that your tenant will pay. Along the same lines as having enough reserves, you need to always protect yourself from your tenants. Even the best tenants can experience an unexpected loss of employment or a short term loss of income. You always assume that your tenant will pay their rent, but things happen that will leave you scrambling.
Back in 2008-2009, it was almost assumed that whatever property you bought would appreciate 5-10% every year. Even though those numbers were unrealistic, many investors still bought with this assumption in mind. In today’s market, where appreciation gains are slow, they should almost never be factored into any purchase decision. In fact, appreciation should be looked at as a bonus and something that probably won’t happen for many years. If you are basing your purchase on the mindset that values will rise in the near future, you are setting yourself up for disaster. The market may go up, but as we have seen, it may also go down. The fact that we have been waiting for values to rise over the past few years is a sign that we may be waiting several more years for the dramatic jumps in value that some investors are looking for. Appreciation may happen, but don’t depend on it.
The market can change on a dime. A shift in foreign policy, increases in oil prices or a natural disaster can send the market on a perilous slide. Even though we may have seen the bubble burst coming, it still caught many investors off guard. When changes in the market happen, you need to be ready to act. If you feel the market is going down, it may be time to sell. If you think that the market is in an upswing and you want to take a break from buying, you can do that too. Whatever is going on with the market, you need to be able to react quickly and have conviction in your decisions. Doing nothing is often the worst plan of attack, regardless of the situation. All of your education and experience should prepare you to handle changes in the market. When they come, you need to be ready to take advantage of them.
Trends are established all the time in business. The best investors and businesspeople know when to get on and off of trends. The market collapse may have sent many investors out of the business, but it also created the short sale and foreclosure craze. Those investors who were able to shift gears and see this trend at the beginning were able to get some very good deals. It may have been foreign to them and have been an entirely new way to invest, but they educated themselves quickly and were first to the market. In the next five years, there will likely be another trend, or two, that is made in the real estate market. Those investors who can react to changing markets and reinvent themselves are the ones that will survive in any environment.
Nobody really knows where the market will be in five years. Hopefully investors that lived through the collapse and new ones that entered the market after will learn from others mistakes. Years of hard work were erased in just a few months’ time. That is how quickly things can change. If you can prepare yourself with enough assets and the ability to make quick decisions, you can soften the blow and survive the ups and downs of the business. Even though the mortgage meltdown may have been a once in a generation event, sudden shifts in the market can happen at any time. By taking on safer investments and preparing yourself for the worst case scenario, you can make it through any environment and any situation. The mortgage collapse may have been five years ago, but the lessons learned still ring true today.