One of the most interesting and dynamic sectors today is real estate business. In this sector, houses and parcels of land are bought and sold. Real estate is lucrative because it addresses a human need, shelter. Therefore, individuals like Donald Trump have made billions in this sector by trading in property. Despite its high chances of profit, the real estate market can face a crash. A real estate crash is a drop in the total value of the entire market. It is where property prices drop so much that investors begin fleeing the real estate market by selling their properties at huge losses. Investors in real estate stocks proceed to unload their holdings to other investors in a panic sale. This causes a decline in the market and negatively affects the economy. A real estate market crash is often caused by a burst bubble. Moreover, it leads to an economic depression. As an investor, there are ways to cover your investment. Here is how to protect yourself from a real estate market crash.
Make a budget to determine your financial buying power
Calculate your own budget so as to determine the amount of money which you can afford to buy a house. Many people rely on the opinions of their real estate agents so as to make decision on the house that they can afford to buy. Others rely on their mortgage lenders. This often results in purchasing a house that you can hardly pay for. As such, when the real estate market crashes, the house loses value and with your financial difficulties, you cannot afford to pay for it any more. Therefore, trust yourself and make a budget of how much money you can afford to pay for a house. This can be an outright purchase or a mortgage payment. This budget should also include the house maintenance costs.
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Avoid zero down payment financing plans
There are financing plans of various types in the real estate market. They all have some incentives to attract home buyers. One of the incentives which is commonly used is the zero downpayment plan. This one is where you get a loan to purchase your house with no financial investment required on your part. Thus, the providers of the loan essentially own the house you are paying for in installments. Thus, if the real estate market crashes, they will promptly sell it to cover your loan repayment and you will remain homeless since you didn't own any part of it. Therefore, avoid such arrangements. Go for financing plans which have a 10% or 20% downpayment rate. This will give you some equity in your house. It is important to note that if you cannot afford to make a downpayment, you definitely cannot afford the home.
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Know when to buy and when to rent a house
Houses are some of the assets that we buy for long term ownership. Majority of people stay in their homes for over a decade after purchase. However, we all have the option to rent out a house. This is where we pay rent every month so as to continue living there. To protect yourself from a real estate market crash, don't buy a house if you do not intend to live in it for more than 5 years. If you expect to live in a particular city or neighborhood for less than 5 years, rent a house instead of buying one. This is because the money which is used during purchase is often recovered 5 years later and this would be too late for you.
Move to a fixed rate mortgage
Many people rely on morgages to own a home. These financial vehicles allow you to live in a house and pay installments for a particular number of years. Once you finish paying, the house becomes all yours. There are two main types of mortgages. These are the fixed rate and the adjustable rate mortgage. An adjustable rate mortgage is one where the interest rate of the loan can increase or decrease according to market conditions. If the rate rises, then you will pay more money in your installments to keep your house. On the other hand, a fixed rate mortgage is one where the interest rate is fixed and does not change no matter what the market conditions seem to be. To protect yourself from a real estate market crash, you should move from an adjustable rate mortgage to a fixed rate one. This allows you to pay installments at a lower, secure and non-adjustable rate. In this way, if the real estate market crashes and mortgage payments shoot up, yours will remain stable and you can continue to afford living in your house.
Perform a rating analysis of your savings bank
As soon as you begin earning, it is important to begin saving some money. You can save it in a special account in a bank or a savings and credit union. These establishments can host your savings account and even offer growth in your balance at a particular rate. It is important to know that banks and other financial establishments normally make tremendous investment in real estate. Therefore, if the market crashes, the financial institutions could go under as well. Therefore, to protect your savings from a real estate market crash, assess your savings account holder with professional analysis ratings. This one tells you if the eablishment is equpped to survive a market crash.
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Diversify your investment portfolio
There are many instruments that you can invest in today. Examples of these are stocks, real estate, Certificates of Deposit (CDs) and treasury bills. Each type offers you a unique rate of return. Moreover, some instruments are more stable than others. Everyone is encouraged to invest in them. By diversifying your portfolio such that you have a little of everything, you can survive a real estate market crash. While your real estate investments may suffer, the rest will stay strong and keep you afloat.
The Important Take Away
The real estate market is lucrative. Investors have made millions in it. However, it is always prone to a crash. The steps above can help you to protect yourself from one. Each is backed by reliable evidence. They are gems of wisdom for every aspiring home owner and real estate investor.