SS179: Real Estate Investment Strategies for a Recession

SS179 Real Estate Investment Strategies for a Recession

Recessions are inevitable. However, real estate investors who prepare for them can weather the storm. In this episode, Charles discusses some investment strategies to help prepare investors for a downturn.

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Talking Points:

  • The National Bureau of Economic Research defines a recession as any period of “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
  • During a recession, some investors may become nervous, sell their holdings, and resort to holding cash, while other investors may focus on acquiring recession-proof real estate investments.
  • Investing in real estate during a recession requires a different strategy when compared to investing during times of economic growth.

 

  1. Cash is King. When acquiring properties during a recession, having cash is crucial. Typically, during a recession, lenders are much more conservative, which translates to borrowers usually having to bring more cash to the closing table since loan-to-values are lower. Buyers with cash on hand are best positioned to take advantage of deals when they arise. For property owners during a recession, having a larger than usual cash reserve puts you and your property in the best position to withstand the recession.
  2. Prioritize Cash Flow. Focus on real estate asset classes and properties with consistent cash flow during a recession. Jobless claims are one indicator of an upcoming recession. Retail spending typically slows, and companies don’t expand when that happens. As a real estate investor, I avoid retail and office properties but focus on multifamily properties since they produce strong cash flow through all stages of an economic cycle, especially during a recession. Targeting properties in markets with strong demand and positive cash flow from day one, will dramatically lower your risk.
  3. Target Undervalued Properties. Typically, we will avoid heavy value-add, heavy renovation projects during a recession unless we are purchasing at a very steep discount. We are mainly looking for properties with minimal vacancy, and under market rents, that require light renovation. Minimal vacancy means that there is strong cash flow day one. A property that only requires light renovations, means that the property will not require a large cash infusion. Light renovations, along with under market rents equates to investors getting their renovation capital back in months, not years.
  4. Don’t Overleverage and Reduce Debt. During recessions it is typically harder to overleverage properties but, it is a metric that investors should not dismiss. Lower leverage equals lower risk. If you already own a property, maybe reduce debt by paying it down additionally each month, if that is an option or put that additional principal paydown in your cash reserves. Either way, , they both lower your risk.
  5. Adopt a Long-Term Mindset and Focus on Operations. Believing in the fact that economic downturns are short term fluctuations, while understanding that good properties in growing markets always comeback, is paramount to weathering a recession. The property owner should be focused solely on improving operations; lowering turnover, improving tenant screening, keeping rents at market prices, and performing small renovations that increase the property’s value over time.
  6. Thorough Due Diligence. No matter when you are purchasing a property; make sure to perform in-depth due diligence, especially during a recession. When the real estate market is stagnant, you cannot count on rent increases to correct mistakes made during the purchase. Secondly, don’t be afraid to ask the seller for discounts. If something is broken or near the end of its life cycle, bring it to the seller’s attention, and tell them what is will cost to replace with a written estimate.

If you utilize these investment strategies during a recession, you can best position yourself to navigate the changing market conditions and capitalize on different opportunities.

Transcript:

Charles:
In the midst of every crisis, lies great opportunity., a quote by Albert Einstein. And in this video, we are gonna uncover the hidden gems in real estate investment during a recession.

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing real estate investment strategies for recession. The National Bureau of Economic Research defines a recession as any period of significant decline in economic activity spread across the economy that lasts more than a few months. Now, during a recession, some investors may become nervous, sell their holdings and resort to holding cash. While other investors may focus on acquiring recession proof real estate investments. Investing in real estate during a recession requires a different strategy when compared to investing during times of economic growth. Number one is cash is king. When acquiring properties during a recession, having cash is crucial. Typically during a recession, lenders are much more conservative, which translate to borrowers usually having to bring more cash to the closing table.

Charles:
Since loan to values are lower, buyers with cash on hand are best positioned to take advantage of deals when they arise. For property owners during a recession having a larger than usual cash reserve puts you and your property in the best position to withstand the recession. Two, prioritize cash flow. Focus on real estate asset classes, and properties with consistent cash flow during a recession. So jobless claims are one of the indicators of an upcoming recession. Retail spending typically slows, companies don’t expand, and when that happens, you have to be ready for that. So as a real estate investor, I avoid retail and office properties, but focus on multifamily properties since they produce strong cash flow through all stages of an economic cycle, especially during a recession. Targeting properties in markets with strong demand and positive cash flow from day one will dramatically lower your risk.

Charles:
Three target undervalued properties. So typically we will avoid heavy value add, so heavy renovation projects during a recession, unless we are purchasing a property at a very steep discount. Now we are mainly looking for properties with minimal vacancy and under market rents that require light. Novation. Minimal vacancy means that there are strong cash flow from day one. A property that only requires light renovations means that the property will not require a large cash in fusion by the investors. And light renovations, along with under market rents equates to investors getting the renovation capital back in months, not years. Four, don’t over-leverage and reduce debt. So during recessions, it is typically harder to leverage of properties. It’s a metric that investors should not dismiss though, because lower leverage equates to lower risk. And if you already own a property, maybe reduced risk by reducing debt, by paying it down additionally each month if that’s an option.

Charles:
Or put that additional principle pay down in your capital reserves. Either way, increasing reserves or reducing debt, they both lower your risk. Five is adopt a long-term mindset and focus on operations. Believing in the fact that economic downturns are short-term fluctuations, while understanding that good properties in growing markets always come back is paramount to weathering a recession. The property owner should be focused solely on improving operations, lowering turnover, improving tenant screening, keeping rents at market price, and performing small renovations that increase the property’s value over time. Six is thorough due diligence. Now, no matter when you’re purchasing a property, make sure to perform in-depth due diligence, especially during a recession. When the real estate market is stagnant, you cannot count on rent increases to correct mistakes made during the purchase. Secondly, don’t be afraid to ask the seller for discounts if something is broken or near the end of its lifecycle.

Charles:
Bring it to the seller’s attention and tell them what it’ll cost to replace with a written estimate. Now, if you utilize these investment strategies during a recession, you can best position yourself to navigate the changing marketing positions and capitalize on different opportunities. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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