Tuesday, November 23, 2010

Lessons from the Great Recession - Edmonton Sun

Gary Lamphier of the Edmonton sun recounts 10 Lessons to Learn from the Great Recession. It's focused reading and informative and he does a great job of summing them up.

I have 5 things I learned from the global recession of 2008:

1. Keep a cash reserve - you need a reserve that can be accessed whenever you need it. Hopefully it will be large. A line of credit is the obvious choice it should be set up long before you need it because we all know banks don't give out money to the needy. You have to prove you can pay it back.

2. Keep your costs as low as possible - Don't spend on anything superfluous. Unless it's improving property value or reducing tenant turnover - you don't need it. I think this way for my own home too! It's comfortable but I'm not getting into consumer debt without seriously thinking about it.

3. Expect to pay more than you are - We ride the variable and can handle the thrill. Mortgage rates went to historical lows but if I buy my properties expecting to pay 5, 6 or 7% they are able to survive any rate fluctuations and consistently produce cashflow. These low rates are not here to stay bank on them being higher and give your portfolio an excellent buffer. Do this with every expense you have related to your investment - build a buffer (see number 1)

4. Never over leverage - Leverage is what makes real estate an incredible investment but if you get too leveraged you're on thin ice. You can easily find investments that will produce well with 80% loan to value. Sure it's great to save some cash and get a 90% or 95% LTV but if rates go up and your mortgage payments are higher than your rental income you'll have some serious trouble with negative cashflow.

5. This too shall pass - You might get wiped out - it does happen but what are you going to do? Give up? Robert Kiyosaki said 9 out of 10 businesses fail. Be prepared to fail and try again. The knowledge you learn in a economic crisis is what makes you an expert. You'll know how to protect yourself in the future. Failure is the best education you can get.

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