Over the past three years, an enormous influx of money at historically low interest rates has caused a surge in asset prices, leading many investors to appear more successful than they actually are. The mix of affordable payments and a hyper-inflationary environment lends many individuals the ability to take on substantial debts to obtain these over-inflated assets, but as interest rates rise, these same investors are now grappling with exorbitant payments. Consequently, many investors are withdrawing from the market to convert assets into cash, many of whom are doing so at a loss. With declining asset prices projected to persist, many investors are unsure of how to invest safely in this market. In this article, we will explore four surefire ways to invest more strategically in a declining market.

1. Tighten up your criteria

It is important for real estate investors to be more strict with their investment criteria when buying a property in a declining real estate market because such markets pose a greater risk. In a declining real estate market, property prices are generally falling, which means that there is a greater chance that the investor’s initial projections may not come true.

To avoid such risks, it is important for real estate investors to be more strict with their investment criteria. Look for properties that you can buy at a steep discount, properties that have growth potential, properties that produce more cash flow and or properties that in general, perform at your desired level with a higher probability of success.

Tightening up investment criteria can help real estate investors avoid making bad investment decisions in a declining market. This may not mean that the property performs better. Perhaps you spend more time in the due diligence process, or perhaps you include more conditions in your offer. The importance here is to only consider properties that have a lowered risk exposure, because as profitable as investing during a recession could be, it can also prove detrimental to your portfolio without the proper safety measures in place.

Focus on properties with a stronger fundamental outlook, which may be better positioned to weather the downturn and potentially rebound in the future. This can help investors avoid the temptation to chase after properties with high short-term returns, which may be more susceptible to volatility and risk in a declining market.

Overall, tightening up investment criteria can help real estate investors make more informed and strategic investment decisions, which can lead to better long-term performance and greater portfolio resilience in a challenging market environment.

2. Be Selective with your comparables

Investors should be more selective in the comparable properties they use when buying real estate in a declining market and here’s why. In a declining market, properties can lose value rapidly, and it may be difficult to find comparable properties that accurately reflect the current market conditions.

If an investor relies on comparable properties that were sold at higher-end prices it may be difficult to achieve those higher values as prices decline. Additionally, if an investor relies on comparable properties sold that are more than 2-3 months old, even if those prices are on the lower end of the market, this information may be outdated. Either of these two scenarios can be enough to meaningfully affect the return on your investment, but making both of these mistakes can be detrimental to your properties performance.

On the other hand, if an investor selects comparable properties that have sold recently, within 2-3 month, in similar market conditions, and are cognizant to choose properties that have sold on the lower end of the comparables on the market, than they are more likely to get an accurate picture of the current market value of the property they are interested in. This will help them make a more informed decision about the price they are willing to pay and can help them avoid overpaying for a property that may lose value in the future.

Declining markets are difficult because prices are constantly changing for the worse. Therefore, being selective in the comparable properties used in a declining market is essential for investors to make informed decisions and protect their investments.

3. Plan for increasing interest rates

Real estate investors should plan for increasing interest rates when buying real estate in an unstable economic environment because interest rates have a significant impact on the cost of borrowing money, which is a critical component of real estate investing.

In an unstable economic environment, interest rates may fluctuate rapidly and without warning. Higher interest rates can lead to increased borrowing costs, which can reduce the profitability of real estate investments. This is because higher interest rates can increase the cost of financing a property purchase or renovation project, which can lower the return on investment.

Additionally, higher interest rates can reduce the purchasing power of potential buyers, which can result in a decreased demand for real estate. This can lead to a slowdown in the real estate market and a decline in property values.

Real estate investors should, therefore, plan for increasing interest rates by considering the impact of potential rate hikes on their real estate investments. They should be prepared to adjust their investment strategies, such as seeking out alternative financing sources with lower interest rates or adjusting the rental rates to accommodate the increased borrowing costs. Investors should also ensure that they have sufficient cash reserves to weather any potential economic instability, including higher interest rates, which can impact their cash flow.

In summary, real estate investors should plan for increasing interest rates when buying real estate in an unstable economic environment to mitigate the risk of decreased profitability and to prepare for potential market fluctuations.

4. Look for flexible deals

It is important to only be looking for real estate investments that have multiple exit strategies, especially during difficult times, because it provides more flexibility and reduces risk to the investor.

During a recessionary environment, the real estate market can be volatile, and property values are likely to decline as purchasing power decreases. This may affect the liquidity of your investment. By having multiple exit strategies, an investor has more options for how to handle the investment if their original plan doesn't work out as expected.

For example, if an investor initially planned to flip a property but the market declines, they may not be able to sell the property for the desired price. However, if they have the option to hold onto the property and rent it out, they can still generate income and potentially sell it at a later time when the market improves.

Other potential exit strategies could include selling the property to another investor as a Joint Venture, refinancing the property to lower monthly payments, or converting the property to a different use, from a long term rental to a short term rental, from a commercial property to a residential property.

Having multiple exit strategies can help ensure that an investor is not stuck with a property that forces them into a loss. It can protect against unexpected events, changes in the market, or unforeseen expenses that may arise as a result of the changing recessionary environment.

Joseph Costanza

Costanza Capital Investments

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