Real Estate Investment Strategies for a Credit Crunch - dummies

Real Estate Investment Strategies for a Credit Crunch

By Nicholas Wallwork

A financial crisis that leads to a credit crunch (a sudden drop in the availability of financing) is challenging for most real estate investors, especially in the first 12 to 24 months of the crisis. There’s a lot of uncertainty, verging on what can sometimes feel like pandemonium. The value of assets is dropping, perhaps sharply, meaning your properties are worth less than they were the year before, or even the month before.

During the first 12 months of a financial crisis, it’s not a great idea to go running headfirst into a new strategy that you’ve never deployed before. In my experience, those early months are the worst. Depending on your overall goals, your level of expertise, and your financial situation, this may be the best time to sit tight, focus on the investments you already have, and see how things shake out once the initial market panic subsides.

My intention here is not to get you jumping into investment decisions at the first sign of crisis; instead, it’s about positioning yourself and your portfolio in a way that means you can still make money during a credit crunch. Because, even in falling or stagnant markets, there are still many strategies that can work brilliantly.

How to work with the challenging market

It stands to reason that the middle of a credit crunch is not a great time to be trying to sell a property, or property leads for that matter. Without ready access to finance, fewer people are willing or able to purchase your properties, no matter how great your product is. In a tough market, your income-focused strategies are your best friends. For the most part, this will mean rental income — after all, people who can no longer get a mortgage will be forced to rent until the banks will lend to them.

If you’re investing for income, you’re better positioned to weather the kind of storms that negatively impact capital-growth strategies.

These may be the ideal conditions for income-based strategies, but you still have to work hard to make a success of it. You’ve still got to make sure that your product is right for your target audience (so, don’t try to target a property as a student rental when it’s 20 miles away from the university). And you still need to add value for your customers. If your customers are tenants, that means offering the kind of quality accommodation that makes them want to stay put.

When times are tough, managing your cash flow properly is more important than ever. And that means carefully factoring in fluctuations in your income and costs — for example, by planning for void periods (where a property or a room is sitting vacant).

If you’re feeling confident and you’re financially able, this can be an excellent time to expand your real estate portfolio. It’s a buyer’s market after all, with low prices and highly motivated sellers, meaning you can pick up some bargain properties.

Suitable crunch strategies

Take a look at some of the income-based strategies that work well in a challenging market:

  • Rent-to-rent: This strategy involves renting a property from an existing landlord and then (with permission) subletting it out on a room-by-room basis. What’s great about this strategy is that, in the middle of a credit crunch, if you’re struggling to access financing for your property ventures, rent-to-rent requires little startup capital, at most the first month’s rent and a security deposit.
  • Houses in multiple occupation (HMOs): This is a fast-growing strategy, particularly in the UK and Europe. An HMO strategy involves renting out rooms in a property to multiple individual tenants (typically three or more separate tenants to qualify as an HMO). It’s a bit like rent-to-rent, except you own rather than lease the property (which is even better if you can buy the property cheap in a market slump). Because you’re renting rooms to multiple separate tenants, rather than renting a property to one tenant, you can significantly increase your income — and still cover the mortgage and bills even if a room or two stands empty for a while, also making it, in my view, a low-risk strategy.
  • Renting to students and low-income-housing tenants: Students and low-income-housing tenants tend to get a bad rap, and many investors avoid these target markets like the plague. But with the right product and careful management, this strategy can deliver steady-as-she-goes income in a down or flat market.

Variations on the rent-to-rent theme can offer some “outside the box” opportunities in a credit crunch, even if you’ve got little capital to grow your real estate portfolio. Say, for example, someone in your circle of contacts is struggling to pay his mortgage because he’s been let go from his job. You can agree to cover his mortgage costs; lease the property from him; and get stable, long-term tenants in there to more than cover the cost of the mortgage.

Likewise, someone who’s looking to sell up and downsize as she approaches retirement, who has been unable to find a buyer for her large property, may be very open to your renting the property from her and subletting rooms to tenants. It provides both of you with a steady income when others are feeling the pinch. In tough times, there are lots of examples of people who would be very open to having their mortgages paid.