The strengthening economy, the bull market and hot housing market over the last few years has given real estate investors great opportunities to grow their portfolios, especially in Philadelphia. But how long will the economy stay this strong? Is the high volatility in the stock market (Dec 2018) an indicator that a correction is coming? A growing number of indicators have most economists now forecasting a recession coming “soon.” Philadelphia saw a significant slowdown in housing value increases in 2018. How should investors who operate their real estate investing businesses with fix and flip financing Philadelphia be preparing for an economic shift? Here are four rules to follow from real estate investors who learned how to succeed in America’s last recession.
1. Triple-check the math on your deals
When you’ve been in a hot housing market like we have been in Philadelphia the last few years, it’s easy to become less disciplined about working the math on your deals. You know intuitively what flips are going to work out. With the housing market starting to cool, make sure the numbers work on your deals. Select your comps more carefully, sticking to shorter time frames. When you’ve worked out what looks like a good deal, recalculate it with a 10% reduction to your ARV (maybe 15%) to see if it’s still a good deal should there be a drop in housing values while you’re rehabbing it.
2. Prepare a Plan B (and Plans C & D)
Worst case scenario—you complete your rehab and can’t sell it… would you be able to rent it out and refinance (and pay off your fix and flip financing Philadelphia)? Are the deal fundamentals strong enough to switch your strategy from fix-and-flip to BRRRR? Could you do a lease option on it? Short-term vacation rental?
3. Run shorter rehabs
If you’re completing your rehabs in three to six months, you’re in good shape to keep flipping houses at your current pace. But if you’re regularly running five or six rehabs over one-year terms, think about how much housing values can change in one year, and start restructuring to run more of your projects on shorter terms.
4. Increase your cash reserves
Do you manage your rental portfolio with three to six months of cash reserves? Are you running your rehab operation with strong levels of cash reserves? Prepare for the economic shift by building up your cash reserves. If you normally have three months, go up to six; if six go up to nine. This could be a strategic time to convert some assets to cash. Do you have low (or no) cashflow rental houses in your portfolio? If rental prices were to drop by 10% do you have properties than would no longer be cashflowing? By selling off these houses now, you could increase your cash reserves. In previous recessions, real estate investors getting the great deals had capital to work with.
By rethinking your investing and following these four rules for a turning economy, you’ll keep your business in good shape for fix and flip financing Philadelphia.