5 Tips to Recession-Proof Your Investments in Colorado Springs Real Estate
Want to purchase investment property and increase your real estate investment portfolio in Colorado Springs? Here is important advice to recession-proof your assets.
Why consider the effects of a recession on real estate values in Colorado Springs? Because the market is cyclical, meaning property prices change all the time – sometimes up, sometimes down. When home values go down, you’ll be glad you took precautions ahead of time. If you position the property correctly, take good care of it, and organize your finances appropriately, then you’ll still get a good return on investment even in a recession.
As I write this, the stock market has recently seen some massive swings both down and up. Mortgage interest rates are up a full percentage point from a year prior, making housing less affordable. Experts are starting to spread rumors of an impending bear market on Wall Street and a slowdown in the real estate market.
Colorado Springs gathers accolades for our appeal among young professionals, and maintains its long-standing attractiveness for retirees. Colorado Springs has something for everyone. This city is indeed a great place to live. But no matter how nice a community it is, when the next recession comes to the nation, Colorado Springs won’t be totally insulated from it. We may fare better than other cities, but that doesn’t mean we’ll avoid every rough patch along the way.
If you follow these 5 Tips to Recession-Proof Your Investments in Colorado Springs Real Estate, then you can profit even when others around you struggle to make it through the next downturn.
Increase reserves and reduce leverage
Leverage refers to how much of a loan you borrow to buy the property. Reserves refers to how much additional cash you have that you don’t use to buy the property. The most recession-proof scenario is low leverage and high reserves.
Mortgage lenders have leverage and reserves criteria that buyers must meet to get a loan. But your own personal criteria may be different from a lender’s. A lender may need to see that you have 2 months, 6 months, or a year’s worth of reserves – that’s cash you have on hand to cover the mortgage and operating expenses of your properties. But in order to be secure in the event of a recession, you may decide that you’re going to save 2 years worth of cash in reserves. That means that even with no income, you could continue to own and maintain the property.
A mortgage lender may offer you a mortgage on 80% leverage (meaning, 20% down payment). But to be sure you never have to stretch to cover your mortgage payments, you may prefer to leverage only 50%, putting cash down for the other 50% of the purchase price.
The downsides of increasing your reserves and reducing your leverage on property purchases are that you may experience a lower cash-on-cash return. That means the amount of income you get per year from your investment, as a percentage of the amount of cash you invested up front into purchasing the property, is low. Also, you may have to wait longer to purchase your first investment property or subsequent properties.
One way to handle this is to enter the investment with maximum leverage and minimum reserves, then work diligently to quickly build up your reserves and work down your leverage. For example, pay down the mortgage faster than the amortization schedule, in case of emergencies including market shake-ups. If you do this, after a few years your investment will be nearly recession-proof from following only this advice.
Don’t be penny wise and pound foolish
At initial home inspection and during ownership, problems with the property’s physical condition will be identified. Don’t let small things fester into big problems. The leaking shower may appear small at first, but over time, it can balloon into water damage and mold. A few-dollar problem relating to fixing some caulk turns into a few-thousand dollar problem by being neglected.
Be proactive by making small physical repairs to maintain the long-term integrity of your property. If exterior paint is chipping, revealing the wood beneath, it’s only a matter of time until that wood becomes water-damaged, which then may attract termites and other pests, which can fully destroy the structure of the house. Spend the hundred dollars now to repaint and avoid a multi-thousand-dollar problem later.
When hiring help to make repairs, select contractors who are licensed, bonded, and insured, and who warranty their work so that you’re protected from financial harm if their initial repair work fails. A recession brings not only a reduction in property values but also a reduction in in income, which makes it more difficult to properly maintain and fix properties. If you take care of things ahead of time, you ensure that your property won’t require fixing a big expensive problem right in a moment of insufficient income. Plus, it prevents the all-too-common issue of poor property condition exacerbating the loss in property value that a recession brings.
Get thorough property inspections
Before closing on your real estate purchase, get the property thoroughly inspected. This process begins with a general home inspector. But consider also engaging a roofer, HVAC professional, and a sewer scope to lay expert eye son some of the most expensive systems in the house. If there’s any reason to think there could be structural problems, make sure to get a structural engineer out to evaluate the property.
If these inspectors find problems, that doesn’t mean you can’t buy the property. Just make certain that you fully understand the property’s condition and cost to repair, and that you get problems fixed immediately upon obtaining ownership. From a financial standpoint, during the purchase transaction you may find it necessary to request the seller to make repairs, lower the purchase price, or provide monetary credits to make the purchase worth it for you, considering inspection items. That’s a personal choice that you’ll want to evaluate against the costs of the repairs and the overall total value of the property.
Get informed, understand the problems, seek out accurate repair costs, and if you do move forward with purchasing the property, get necessary repairs made right away. This helps insulate you and your property from recession problems by ensuring that your property is in good condition and is attractive to buyers and renters at the moment you need to rent or sell without delay.
Properly position the property
One problem that recessions cause is an overabundance of housing supply. That means there are too many houses available and not enough people who can afford them at recent market values. This may be due to a loss of jobs, plateau in wages, rise in overall cost of living, and/or significant jumps in mortgage interest rates. Thus, market values must decline until more people can afford the available housing. If you’re flipping a property, you may have to reduce your asking price to get a buyer. If you’re renting out the investment property, you’ll neighbors will compete with you by underpricing you on their rent requests.
Properly positioning your property means selecting and creating a housing option that will remain both popular with the masses and prosperous for you even under recession conditions. Identify your goal, select an appropriate property for your goal, design an executable strategy for the property, and execute your strategy.
For example, if you are purchasing a property to rent out, don’t select areas that are already oversaturated with rental units, which will underprice you in the recession. Check area performance in the last recession to see which areas did ok in the last recession and stick to them. Get something in a location where your property will be in the lower half of prices for the area, and fix up your property so that it’s in better condition than at least 50% of surrounding homes renting for the same price. Now, you’ll be leasing out (relative to the neighborhood) good condition housing at an (compared to the neighborhood) affordable price. That’s the recipe for success in any market, including in a recession when competition for renters is fierce.
Purchase a property you’d be wiling to live in if you had to
The final tip you should implement in your property-acquisition strategy is to seek out and purchase only properties that are acceptable housing for you personally. They don’t have to be your ideal homes – but places that if you needed to, you would feel fine living there. You should be able to picture yourself feeling safe, secure, and content living there. The home may be a little small for your tastes, or a little plain compared to your ideal, but that’s ok.
Do you like this neighborhood? Do you find the location convenient and friendly? Could it feel like home if you needed to be there for a few years? The reason to ask these questions of yourself is, first, because if you like the neighborhood, there’s a much greater chance that others will too – meaning buyers and renters now and in the future. This is also an important conversation to have with yourself because in a recession it can become necessary to sell one of your properties – and you may not get a choice about which property the marketplace will buy for a price you can accept. Recession means fewer buyers, and by definition they pay lower prices than what we’ve been accustomed to. So if you must sell your current residence to get by, you’ll have the income property as an acceptable backup place to live temporarily.
Prepare to weather a recession long before you have to
I don’t enjoy the idea of recessions any more than you do, but they are inevitable. Especially if you’re acquiring property with the intent to hold it for the long-run, these are especially important issues to take into consideration. As you may need to hold the property through one or more recessions, plan from the beginning and strategize ahead of time to protect yourself and your investments for the lo