The adage, “the best offense is a good defense,” applies to many things–football, military combat, video games, and fending off attempts to set you up on unwanted blind dates. It also holds true when it comes to real estate investing. Utilizing a defensive strategy can increase your chances of seeing huge profits while protecting against potential pitfalls. Let’s look at a defensive strategy for real estate investors to see how it might work for you.
What is a Defensive Investing Strategy?
Your investment strategy is your approach to investing your money. This strategy guides your investing choices and provides a context to guide your decision-making. A defensive strategy aims to reduce downside risks while allowing a positive long-term return. In other words, it works to prevent losses while still ensuring you make plenty of money.
Because real estate investing is a long-term undertaking, it fits in perfectly with defensive strategies. You won’t make $10,000 in a day like you theoretically could, shorting a stock, but you also won’t lose $15,000 in a day, which could also happen with stock shorting. Instead, your money will gradually and consistently grow, with little risk of losses as long as you stick with your plan.
Here are some ways to keep your real estate investing strategy defensively focused:
Avoid Volatile Real Estate Asset Classes
It’s no secret that we champion investing in single-family homes. We’ve built a business around helping people do just that. We favor these homes over large multi-family units, office space, or other options because, historically, they are more stable. You need only look back to the 2020 market and what happened to commercial real estate to see what can happen if the economy shifts suddenly.
When workers moved to their living rooms and restaurants closed, office buildings and commercial properties suffered staggering losses. People will always need places to live, which makes holding residential real estate a much more defensive strategy. That doesn’t mean there will never be brief periods when even single-family homes lose some value, but they are much less recession-prone than other real estate classes.
Another way to manage downside risk and defend your investments against losses is diversification. The more spread out your portfolio, the less you will be affected if one area sees a temporary downturn. If you own five properties on the same street, increasing crime and decreasing school rates in that area will affect all your properties and badly hurt your bottom line.
If, on the other hand, your properties are geographically diverse, these shifts in neighborhood desirability will have less effect. You won’t have to wait to see increases in your overall profit until the cyclical changes in neighborhood preferences swing back in your favor. If you buy an apartment building, you go all-in on one area.
With single-family homes, you can own one in Salt Lake City, Utah; another in Oklahoma City; and a third in Louisville, Kentucky. That provides some immunity not only from changes in a neighborhood but also from population shifts, changes in major local employers, and regional economic patterns.
Of course, finding and managing properties across the country can be challenging, especially if you are a thoughtful investor who wants to carefully vet a potential home before purchasing. Thankfully, working with a home investment company can provide certainty in decision-making and reliability in investment, regardless of location or proximity to you. They research the best geographic areas for investment and the most promising homes. That allows you to diversify your investments. They can also assist you with property management for your far-flung properties, making the distance a non-issue.
Be Thoughtful About Debt
Using leverage is one of the advantages of real estate investing. You get the income from a $350,000 property while only investing $70,000. Even if you have $350,000 to spend, you are better off buying four or five leveraged properties than paying cash for one because more properties mean more income. So feel free to take on debt as part of your investment strategy. However, you can have too much of a good thing.
Be thoughtful about how much you borrow. Ensure you have sufficient cash reserves to cover temporary expenses in your properties. You must be able to service your debt even in a month when you have a two-week vacancy between tenants and another property needs a new stove. Use debt to accelerate your path to financial independence, but only take on what you can handle.
Seek Help from Experts
There’s no reason to tackle real estate investing alone. You likely have a regular job, family, or friends with whom you want to spend time or simply a life you want to enjoy. By outsourcing some of the work of your investment properties, you can make this undertaking feel less like another job and more like passive real estate investing. That means you see the profits without having to put in much effort. You spend less time on your investments and benefit from the expert advice of people whose entire job is understanding what makes a successful investment property. A real estate investment company can search for desirable locations and profitable properties, taking that task off your plate. Their knowledge of real estate investing decreases risks and increases your chances of seeing faster, more significant profits.
You can also work with a property manager. Your diversified portfolio of properties will make it challenging to manage them independently, even if you have the time and patience to do so. Hiring a property manager means no matter how far away your rentals are, someone local is looking after them. Property managers can also help defend your property against damages or problem tenants. They understand how to screen potential renters properly and can also recommend improvements that will have an excellent return on investment.
Using the knowledge and insights of industry professionals like property managers and real estate investment companies is a defensive strategy for real estate investing that takes advantage of the experience of experts to guide you to the most profitable properties and help you avoid expensive issues with your house or tenants.
Defensive investing strategies help you protect your capital while growing your wealth. You decrease risks while maintaining or even increasing the rewards. Sticking with single-family homes and avoiding riskier types of real estate, diversifying your holdings, being thoughtful about debt, and working with experts to find and manage your investment properties will defend against sustained losses and protect your capital.