Real estate investing can make you very wealthy. It can also cause you to lose everything. And while there’s something to be said for maintaining a positive, growth-oriented outlook, you can’t ignore the importance of downside protection.
The importance of downside protection has never been clearer than it is today. As COVID-19 continues to send the economy spinning, thousands of landlords and investors are left dealing with unpaid rent — a problem that’s going to compound in the wake of record-high unemployment numbers.
As an aspiring real estate investor yourself, there are very specific strategies, actions and techniques you can use to mitigate risk and enjoy greater upside in all types of market conditions, pandemics included. Here are a few of them:
1. Invest in the right properties
There’s a saying in real estate that you make your money when you buy. In other words, buying at the right price virtually guarantees that you’ll make a profit over the long run, whereas overpaying will leave you playing catch-up for many years.
In addition to paying a fair price for properties, make sure you’re investing in the right type of real estate. You want real estate that will perform well in all kinds of markets — including growing economies and periods of recession.
Generally speaking, modest single-family homes and apartments located in nice parts of town with close proximity to amenities (jobs, food, shopping, gas, etc.) will always have high demand. Luxury homes, however, are highly dependent on the health of the larger economy.
2. Purchase good insurance
No real estate investor enjoys purchasing insurance, but it’s a necessary tool to have in your risk-protection arsenal.
It’s better to pay for more insurance than you need than it is to not have enough when disaster strikes. In addition to having insurance on each property, consider pulling out an umbrella policy to protect yourself. (Also, tenants should be required to carry renter’s insurance throughout the duration of their lease.)
Moving forward, it’ll be interesting to see how the insurance industry responds to COVID-19. There will likely be more specific pandemic-related policies emerge for investors and other business owners. Depending on the cost and terms, it may be worth exploring insurance protection for future health crises.
3. Meticulously screen tenants
You can avoid a lot of unnecessary headaches by investing in more stringent and detailed tenant screening processes. At the very least, you need to:
- Pull credit reports
- Speak with current employer
- Speak with current/past landlords
- Order a background check
- Require a thorough application and sizeable security deposit
In the moment, it can feel like you’re being nosy or going overboard, but each of these steps plays a crucial role in helping you secure good tenants (and avoid bad ones).
While you can’t prevent an instance where an individual loses their job, it’s helpful to think about a tenant’s job security. How would future pandemics or crises impact them? Are they in a staple industry, or is their work predicated on a healthy, thriving economy? (We’re not saying you should make decisions based on this factor alone, but it’s worth thinking about as you do your due diligence on prospective tenants.)
4. Streamline rent collection
One of the biggest issues real estate investors — green or experienced — encounter is late rent and the excuses that accompany them. The more you can do to prevent late rent payments, the easier your life will be.
The best way to streamline rent collection is to have your tenants set up direct deposits. This keeps their hands off the rent money and makes it more likely that you’ll receive it at the same time each month.
Another option is to set up an online rent payment portal that tenants can access. This removes the possibility of rent checks getting lost in the mail. It also makes it easy for tenants to pay (no need for writing a check, addressing an envelope, buying stamps, etc.).
If things do get a little tough for tenants during this time, here’s how to give them a little slack while protecting yourself.
5. Partner with the right professionals
Every profitable real estate investor has a strong network of other professionals they rely on for assistance, guidance and service. Here are the people you need to have on speed dial:
- Property manager
- Reputable contractor
- Real estate attorney
- Insurance broker
- CPA or bookkeeper
If you have a team of people you can trust, your job becomes exponentially easier. It also lessens the negative impact of minor mishaps and puts your mind at ease.
6. Keep good records
Real estate is serious business. A failure to comply with the financial and legal rules instituted by the regulatory bodies in your jurisdiction could land you in some very hot water. And the best way to prevent this is to keep good records.
Keeping good records means properly filing and organizing all important documents so that they’re safe and easily accessible. When possible, make digital copies of all paper files you have and save them to the cloud. This lowers the risk of losing your important files in a natural disaster or computer crash.
7. Supercharge your ROI
Real estate investing is a competitive and risky game. And though there will always be factors that you can’t control — such as a massive economic collapse at the hands of a global health pandemic — there are plenty of smaller elements that you have direct influence over. Make sure you’re spending your energy and effort on these latter aspects.
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