There’s a pervasive uncertainty about the future of the market, and in truth, we will never be fully sure of what lies ahead. This is the core principle of index investing—simply continuing to invest in an index fund or ETF, hoping for the market to steadily increase over time. However, for those who are more in tune with market trends, potential triggers for a recession are seemingly on the rise. So what does this imply for real estate investors?
This article, penned by the Semi-Retired MD, provides five key strategies for effectively investing in real estate amidst a market downturn or recession.
As the threat of a recession becomes more apparent, we’re eager to provide some advice to not only weather the storm, but to flourish within it. Some investors may be inclined to retreat and await better times, but our community does not share this sentiment. Many have been anticipating this downturn, recognizing that economic downturns tend to generate more millionaires than periods of prosperity. They are aware that the fervent seller’s market is nearing its end, and that numerous opportunities to begin investing in real estate during a recession will emerge. How can these opportunities be seized, and how can you prosper within them? We have some suggestions to help you achieve just that!
[Disclaimer: We are not financial advisors, accountants, or lawyers. Please consult your team of professionals about the subjects discussed in this article.]
This article includes affiliate links. If you decide to make a purchase through these links, we will receive a commission at no extra cost to you. Please only spend money on these products if you believe they are necessary and will assist you in accomplishing your objectives.
The fearful “R” term—Recession.
The possibility of a recession is a significant concern, especially when paired with the specter of inflation, which can inspire dread in many individuals. The economy is decelerating, which translates into fewer job opportunities and rising unemployment.
If you’re fortunate to have a job, you’re likely aware that your salary may stagnate or even decrease. Add the effects of inflation, and the purchasing power of your earnings gradually diminishes.
If you’re approaching retirement, your savings could be dwindling in value. The 4% rule may no longer suffice when the cost of living is escalating.
But a Recession Doesn’t Necessarily Spell Disaster for You
Investing in real estate can provide a potent hedge against inflation, as long as your returns from real estate investing surpass the rate of inflation.
How can you stay ahead of inflation? And how can you capitalize on the opportunities that present themselves during a recession?
The principal message of this article is that there are numerous actions you can take, but they require even more strategic execution than before.
Here are our top strategies to help you navigate these challenging times!
Tip #1: Go Beyond Good Deals; Seek Outstanding Deals
In the recent past, the seller’s market has dominated for nearly a decade.
In such a market, where potential buyers significantly outnumber properties for sale, sellers maintain an advantage, making it challenging for buyers to secure good deals.
Numerous investors in our community have managed to obtain good deals in a seller’s market, adopting the mindset and tactics necessary to thrive in a competitive market. But with the end of the seller’s market in sight, opportunities will shift.
Sellers no longer hold all the cards.
So what does this mean for you? It means that it will be easier for the average investor to find a good deal and start investing during the recession. However, in the current inflationary climate, a good deal is not sufficient.
To keep ahead of inflation, you must aim for an outstanding deal.
A “great deal” isn’t clearly defined, so we’ll create a definition. A good deal is securing a property that is 5-10% below market value. An outstanding deal involves a discount greater than 20%.
So How Do You Score an Outstanding Deal?
One approach is to propose a value to the seller that is less than the property’s worth. This approach is often futile in a bustling market, as sellers are unlikely to accept a lower offer with a queue of other potential buyers willing to offer more. However, during a recession, the chances of a seller accepting a lower offer significantly increase.
For the seasoned investors among us, you can be bolder with your lowball offers. As we enter the recession, there will be a growing number of desperate sellers. The key is to swiftly adjust to the changing environment and modify your tactics. Don’t operate as though it’s still a seller’s market.
Another method to secure a good deal is through negotiation. As with any skill, practice and experience will improve your abilities over time. Members of our investor community frequently manage to negotiate impressive discounts, with some even achieving >20% discounts in a hot market!
So imagine the possibilities during a recession. It wouldn’t be surprising if our investors manage to negotiate discounts of 30-40% in the near future.
Tip #2: Force Significant Appreciation
The notion of “forced appreciation” should be familiar to real estate investors. It’s the intentional act of increasing the value of your property, differing from market appreciation because you have direct control over it. You can force appreciation by increasing the income of the property.
The story of an 8-unit property I owned during the 2008 recession exemplifies this. Even during the lowest point of the recession, I managed to force appreciation from $740,000 to $920,000 in a year by raising rent and boosting the income.
Investors in our community have done an incredible job of forcing a great deal of appreciation, but I’m challenging you to go even further.
Make significant appreciation a necessity. Don’t settle for small increases in forced appreciation.
Keep in mind that a recession brings even more opportunities to find deals that allow for forced appreciation. Take advantage of the relationships you’ve fostered and seek out the top-tier deals.
They are available—you just need to first believe they exist, and secondly, have faith that you can secure them.
For those new to real estate investing, there’s still time to jump in. If you’re looking for a shortcut into the field, consider enrolling in our upcoming Zero to Freedom real estate investing course.
Tip #3: Go Beyond Lowering Your Taxes; Aim to Eliminate Them
During periods of rampant inflation, people typically reduce their expenses.
The most significant expense throughout your life? Taxes.
Hence, it makes sense to explore strategies to minimize your taxes. Real estate, specifically investing in rental properties, is one of the most effective ways to achieve this.
In these circumstances, don’t just settle for lower taxes. Strive to eradicate them completely.
How can you eliminate your taxes? By leveraging various tax strategies and conducting careful planning.
Each year, we dedicate time at the start to assess our taxable income and devise a plan to shelter that income.
We pinpoint the strategy we’ll use, whether it involves long-term rentals, short-term rentals, or a blend of both.
For long-term rentals, we utilize real estate professional status. For short-term rentals, we exploit the short-term rental tax loophole.
We also collaborate with a competent real estate CPA. If you’re investing in real estate and don’t yet have a CPA, you’ll likely need one. If you’re interested in working with one of our recommended CPAs, CLICK HERE for a referral.
Tip #4: Deepen Your Relationships
Our community members understand the importance of relationships. If you’re new to investing, you might question which relationships are most valuable.
Real estate agents? Lenders? Fellow investors? The answer is—all of the above.
Real estate agents are a crucial source of deals. If you aim to secure the best deals (the outstanding deals previously mentioned), you’ll need to be high on your agent’s priority list.
So How Do You Forge Strong Relationships?
The key to ascending their list lies in fostering relationships. Who would you be more likely to assist—someone you have a relationship with or a stranger on the corner?
Establishing a relationship with a lender is also critical, ideally before a recession strikes. Lenders are your gateway to funding for deals. During recessions, lending tends to constrict due to increased risk. However, they will continue lending to their best customers—those who pose the lowest investment risk. If lenders know you and have a history of lending to you, they are more likely to perceive you as a lower investment risk.
What about fellow investors? Access to a community of investors is invaluable. Members of our community have begun collaborating on deals, finding larger multifamily properties, for example, and teaming up with other community members to buy the property. So, imagine having access to not only outstanding deals but also larger deals. Spotting excellent deals becomes less challenging when someone else brings you a fantastic opportunity.
These are merely a few examples demonstrating the value of relationships. Numerous other relationships matter during a recession, such as your rapport with your contractor or property managers.
Therefore, focus on strengthening relationships with all members of your team as well as with other investors. This is true during any economic cycle, but it’s especially crucial to enhance this during a recession.
Tip #5: Elevate Your Mindset
We regard this as the most critical tip on this list.
However, we’ve saved it for last as most readers tend to value strategy over mindset. They’re eager to learn the tactics, tips, and tricks to prosper during a recession.
The issue is, strategy will only carry you so far. Real estate investing is rife with hurdles and challenges. Add to this the pervasive fear accompanying recessions. Either of these could impede your progress or, worse, bring you to a standstill.
Imagine making an expensive mistake, then hearing constant doomsaying and being told you’re insane for investing in real estate during a recession.
This is when a robust mindset is crucial—to disregard the skeptics and maintain your convictions. To recover from any mistakes you might make.
The investors in our community understand that your success with real estate investing—and in life in general—depends largely on your mindset.
So you might ask, how do you “work on your mindset”?
The most effective way is to surround yourself with others who are cultivating their mindsets.
Seek out these individuals. They’re not difficult to find. Learn from them, lean on them when you encounter an obstacle, and most importantly, enjoy the journey.
Final Thoughts About Recessions
Bear in mind that recessions have created more millionaires than periods of prosperity. Those who become millionaires are not the ones who sat on the sidelines. So don’t just read this article and store it away.
Decide that you’re going to act, then go out and do it!