There is no predicting what will happen in the real estate market or in your life. Think back to where things were in your business and in your life last year at this time. For some, the changes are pretty dramatic. For others, they are much more subtle. The bottom line is that things change all of the time. If you are not prepared for these changes, you can get caught wondering what if. In the world of real estate, things can go from high to low just like that. In order to stay at a level plan and not have any regrets you need to plan for every possible scenario.
Things will not stay great in real estate forever. If you look back to 2003-2006, real estate was a gold mine. It looked like property values would never go down. Well, they did. Those investors who actually put money away and didn’t take every dime of equity out of their properties managed to survive the storm. Those who did and didn’t prepare for this inevitability were quickly forced out of the business. The investors who prepared and saw the long term picture are still thriving today.
Before you get involved in any deal, you should ask yourself what the worst case scenario is. In addition to the worst case, you should think about what could derail you every step of the way. If you fail to recognize these situations, they will catch you off guard when you least expect them to. At that point, you will be left scrambling, trying to make a snap decision that you may have anticipated months ago. Things rarely go smoothly on every deal. It is those investors that recognize this that can make the most out of a bad situation. You don’t have to let the worst case scenario happen to you, but you should acknowledge that they happen more than we like to think.
Preparing mentally for issues that can arise is one thing, but it is more important to prepare financially. When things are going well and deals are closing, it is easy to spend money thinking you can just make it back on the next deal. If you keep spending like this and deals stop, you will be left with large expenses with no income. Even if bloated expenses aren’t an issue, a lack of reserves may be. It was not the property values that impacted many investors when the market turned, it was the lack of reserves to deal with vacancies. If they had reserves to pay for a month or two or money to offset a short term dip in the rental amount, they may still be in the business. If you are making money you need to put some of it away. The rainy days in real estate come more often than you may think.
If investing was easy, everyone would do it. Those investors who prepare for the what if’s are the ones that will thrive in any market and in every situation.