As a landlord, you would be more than happy if your tenants paid rent on time, your property appreciated every year and you never spent money on repairs. Such a scenario would be ideal. However, anyone that has ever owned an investment property knows that nothing ever goes according to plan. Things will happen to your rental when you least expect them, or when you are least ready for them. The market will constantly ebb upwards and downwards, so you need to take actions to brace yourself for real estate market volatility. The more prepared you are for sudden changes, the less likely that they will have a major impact on your business.
As simple as it may sound, a good portfolio starts with good investments. Properties that carry higher risk are that way for a reason, and the bottom can drop out at any time. Therefore, diversify your portfolio. If you focus on solid deals, you are less likely to be impacted by what is going on in the market. These properties may not be flashy, but they will offer steady returns if their numbers are right. Risky properties are the first ones to go if the market changes. Scrambling for options after the market turns will be futile if you have a weak portfolio.
The biggest reason that investors lost properties when the market collapsed in 2008 was not from changes in interest rates or a reduction of equity, but rather a lack of reserves. If you do not have reserves and the ability to brace for unforeseen expenses, you may want to reconsider owning rental property. Market changes may lead to tenants having trouble paying the rent and eventually vacancy. You can go from having a great property that is producing cash flow to a foreclosure notice on your door in just four months. This is why you need to allocate a portion of any rents received to a reserve fund. Most months you will never dip into it, but it will eventually come in handy. If you don’t have reserves when times are bad, it will lead to disaster.
Buying a good property and saving reserves only makes sense if you maintain your property as well. The best maintained properties will often have the best tenants. It is with good tenants that you can get through tough times. If your tenant has been calling you about fixing a door or replacing a window, you need to take action as quickly as possible. While minor to you, it affects your tenant. Therefore, it should be important to you. In addition to handling minor issues and repairs, you need to stay on top of your property throughout the year. Stay on top of seasonal maintenance and be prepared to make small fixes before they become larger. You can extend the useful life of many appliances if you just take the time to preform basic maintenance. Done correctly, you will have a better property that tenants will want to live in. Moreover, they are more likely to go the extra mile for you if you go the extra mile for them.
It is always easier preparing for items before they occur than dealing with them after the fact. You need to know which expenses you can cut from and which will be around for the duration of the property. Your cash flow is important with any rental, but it is even more important when the market turns south. Every few months, you should take inventory of what expenses you have and what you are paying on them. If there are ways to trim the fat, they at least warrant your consideration. Every dime on your rental property makes a difference. You should look for ways to save before you are forced to cut back.
The market, much like your real estate business, works in cycles. The goal is to try to have as little fluctuation from the norm as possible. Sometimes things will happen to the market that are out of your control and you will need to bear down to get through tough times. These times could last a few weeks or they could last several months. The stronger your portfolio is and the more prepared you are for whatever comes your way, the better position you will be in to handle them. It is usually the decisions you make in the good times that will affect how successful you are in the bad times.