No bull market lasts forever, and with surveys of economists pointing to 2020 as the potential start of another recession, it might be a good time for you to assess whether your business is ready for a downturn.
In the past, the Texas economy has bucked flagging national trends thanks to Houston and the oil economy, according to Louis Torres, research economist with the Real Estate Center at Texas A&M University. With the state already facing headwinds like decreased housing affordability, volatile energy prices, and uncertainty about free-trade agreements, Torres says, if a future recession pairs negative economic growth with low oil prices, the Texas economy could be hit harder than in the past.
Even with home sales up, inventory remaining tight, and prices still rising in many markets, there are steps you can take now to prepare yourself for the threat of a down market.
Examine your business plan
REALTORS® can’t expect this market to go on forever, says broker and instructor Reba Saxon, and they should be prepared for when it does turn.
“We still have a business during a down market,” Saxon says. “But you may need to go about it in different ways.”
And that applies to lead-generation techniques. Where successful agents used to have three solid lead generation sources (their sphere of influence plus two others), according to Saxon, now agents may have six or seven lead-generation techniques going at once.
“You constantly need to try out new lead-generation techniques to find what works for you,” Saxon says, adding that she counsels agent to have a schedule for regularly testing and evaluating new sources.
During a downturn is when expired listings, foreclosures, and short sales all become more common, for example. And now is the time to research those potential lead sources to see what additional education, designations, or marketing techniques you may need to work those sources.
“Pick up a new specialty and learn about it instead of falling into it,” Saxon says.
Saxon suggests you block out time to work on your business and treat it like any other appointment. That could include brainstorming new lead-generating ideas and how to implement them or other business tasks, such as bookkeeping or researching new technology.
“Many agents believe they have their own business, but they’re not acting like it,” Saxon says. “They’re not keeping track of what they’re doing or their books.” The time to put basic business practices in place is before a market downturn hits, according to Saxon, so you’ll have a clear picture of your expenses and where your revenue comes from so you can make informed choices.
Create a financial cushion
Don’t wait until a downturn to examine your personal finances. A strong market is the time to get them in order.
According to Louis Torres, research economist with the Real Estate Center at Texas A&M University, the local effects of a national recession will be somewhat determined by the nature of the regional economy. Areas like Midland and Odessa will be more affected by low oil prices, while the Dallas-Fort Worth metro area is more dependent on the national economy.
“One of the best things any person can do is have at least six months of expenses in emergency savings,” says Katie Brewer, CFP, and president of Your Richest Life Planning in Dallas. And for self-employed individuals, 12 months is better, she says.
Average what you spent in the past three months and base your savings goals on that figure. If you have minimal savings now, start by getting one month’s worth of expenses in the bank, Brewer says. From there, work toward getting three months in cash savings, then six months and a year. The goal is to not have to leverage assets or accumulate debt should your business dry up.
“If you lose your income, you’re going to be focused on fixing that problem, not redoing your budget,” she says, but if you analyze your expenses and plan ahead now, a backup budget could be useful should you experience a sudden drop in income.
Ashley Foster, CFP, with Nxt:Gen Financial Planning in Houston, says he counsels clients to create a structure that gives them clarity on how their money is being allocated. That could involve creating separate accounts for different business tasks—such as marketing and recruiting—and personal expenses, like fixed costs, discretionary spending, and savings.
“The idea is to help them spend less and save more effectively,” Foster says. “This takes the stress out of having to survive cold markets because the they have a plan to weather the storm.”
Plan for your future
“If you recognize that business is good and income is good and you haven’t had time to start a retirement plan, now is a good time to start one,” Brewer says.
There are a number of options for retirement accounts, with the best choice depending on individual income levels, sources, and other savings.
“If you are self-employed, put together a self-employed retirement plan to start saving tax efficiently,” says Scott Bishop, CFP and CPA, with STA Wealth Management in Houston. High-income individuals with no employees might consider a SEP IRA, SIMPLE IRA, or solo 401(k) to save while getting a tax deduction, according to Bishop, while those with less income now could choose to put after-tax savings in a Roth solo 401(k) or Roth IRA so the money will be tax-free in retirement.
A Roth IRA could be a good choice for individuals who don’t otherwise have a cash reserve but want to start saving for retirement, Brewer says. Because the contributions are made after you’ve already paid taxes, the principal can be accessed at any time without incurring a penalty or additional taxes.
While not a substitute for an emergency fund, a Roth IRA can give individuals with variable income more flexibility than pre-tax retirement accounts like a traditional IRA, according to Scott Stratton, CFP, CFA, and president of Good Life Wealth Management in Dallas. “For many of my clients, knowing they can access their Roth account in an emergency really helps them sleep at night,” Stratton says.
Stratton also suggests contributing to a health savings account if you or your spouse are eligible to participate. “The HSA is a great way to shelter income during your high-earning years and be able to access those funds later,” he says. Withdrawals for qualified expenses (e.g., deductibles, copays, or prescriptions) are tax free and the funds in an HSA don’t expire. “It’s the only type of account where you get the double benefit of tax-deductible contributions and tax-free withdrawals.”
Some of the most important things a small-business owner can do are to assemble a team to keep them accountable, according to Brewer. “Get a bookkeeper, get an accountant, get a financial planner,” she says.
Whether you can afford to hire professionals for those roles or have to learn how to complete those tasks yourself, making sure you have a clear view of how your business runs can allow you to see problems before it’s too late and make corrections.
“I’m a business owner myself,” Brewer says. “I’ve joined an accountability group with other business owners.
“I like to challenge myself and beat my peers … I like the competition.”