Real estate meltdown protection plan

By Gail Vaz-Oxlade on March 27, 2013
Estimated reading time: 2 minutes

The trick to avoiding a real estate misstep is to have a home buying/selling plan and sticking to it.

The Twitterverse is full of snippet-warnings on the impending real estate correction that’s just around the corner. This correction has been anticipated for some time but has yet to make an appearance. Some experts believe it’s just a matter of time. So what’s a real estate investor to do when things appear set to change? If you’re planning to buy, you don’t have to worry about buying high if you stay well within what you can afford and don’t plan on moving anytime soon. Buying a home you’ll stay in for the very long term doesn’t require market timing. Over the long term–think 15 years or more–your home will be one of your best investments. Of course, you have to be able to hang on to it that long, which is why over-extending yourself makes no sense. You want something that’s comfortable to manage now, and when interest rise, as they most certainly will. If you’re planning on selling within the next five years, then sooner may be better than later. Did you plan to downsize when you retired? With five or less years to go, capturing your equity now while markets are still flush makes good sense. Looking to upgrade to your forever home? You might want to wait. Lower priced homes tend not to lose as much value while more expensive homes tend to feel the drop most. After a correction you may get almost as much for your existing smaller home, while you save substantially on the upgrade home you buy. If you’re staying put, stop spending your equity. Negative equity–owing more than your home is worth–sucks, and if you keep tapping that equity through lines of credit or by consolidating debt to your mortgage, you’re putting your home’s value into the grey area should a correction come. Yes, it may be very tempting to pull on all that equity you built to have a fabulous family vacation or to finance the start of a new business. But if that equity disappears in a market downturn you’ll feel the gut-wrenching horror of having to write a cheque to the bank to cover the shortfall should you have to sell your home. Real estate, like every other investment, runs in cycles–sometimes up, sometimes down–and every homeowner should be prepared for both sides of the cycle. Knowing what you’re going to do next will help you make the right decision about what to do with your home and your investment.