Is Your Property Recession Resistant? Here are 3 Ways to Guarantee It
How often do you worry about the current state of our economy? Does this have an impact on the way you view commercial real estate investments? You're most likely nodding your head up and down.
If so, in this article you will find 3 recession-proof ways to protect your commercial property. If you do not currently own a commercial property, I will also share what kind of opportunities to look for with your broker when it comes to strategizing a long-term hold.
An important question you should ask yourself as an investor is, how long can my property pay for mortgage and other property xpenses if my vacancy rate were to decline?
#1: Cash
We get advised to have an emergency fund for our own personal finance. We must apply the same principle when it comes to managing the reserved funds for our commercial properties.
You should calculate your property's monthly payments including mortgage and all other expenses. If you have a property with more than one single tenant, calculate the occupancy rate at a much lower number than what it would normally be. Calculating vacancy rate at 60-70% will allow you to see the amount of funds you must reserve to cover at least 12 months of expenses with a low vacancy rate.
Although most lenders prefer to see an 85% break-even ratio, it is safe for you as the property investor to keep it below 75%. The break-even ratio will reflect the occupancy that you must keep in order to continue being able to pay the property's expenses.
The formula for calculating the break-even ratio is as follows:
(Property Expenses + Mortgage Payments) / Gross Income = Break-Even Ratio
#2: Invest In Multitenant Properties
If you invest in a property with multiple units, that means multiple tenants. If you have one tenant and you suddenly lose them, you have a 100% vacancy rate.
However, if you have a property with 7 units, and you lose 2 tenants, you still have 71% occupancy. Depending on the break-even ratio that you calculated above, you might still be able to pay property expenses even with 2 tenants gone.
Having multiple tenants is not only a good recession-resistant way to protect your property, but it is a good investment strategy overall.
#3: Refi your property with lower monthly payments
If you decide to do a rate-and-term refinance to lower your monthly payments, you can increase your property's monthly cash flow and protect yourself during a recession. It is also important that when applying for a rate-and-term refinance that you do not over-leverage your debt.
By keeping your down payment above 20% on each property, you will continue to have positive cash flow on the property, while also protecting your property during a recession.
By combining the principles of the break-even ratio and keeping your debt leverage at an appropriate percentage, you are taking great measures towards making sure your investments are secured during a recession.
Times of uncertainty can create a lot of doubt in panic, not only in prospective buyers, but especially in property owners that have held a property and intend to continue doing so.
If you are strategizing a long-term hold on your investments, make sure that these 3 points are addressed. Without a solid plan, investing can become more complex than it has to be.
For the right guidance on buying, selling, leasing, or managing your existing property, connect with me today. I have over 23 years of experience and would love to be your point of contact in answering any questions or concerns you may have about the complex but beautiful world of commercial real estate.
