We’re not at all sure what’s next for the market.
Frankly, we never will be; that’s kind of the point of index investing – just keeping buying everything via an index fund or ETF and hope things go up and to the right.
But for those a little more plugged into the news, there are a lot of potential catalysts on the horizon that could cause a recession.
What does this mean for real estate investors?
In this post, from the Semi-Retired MD, we take a look at five tips for investing in real estate during a market downturn or a recession.
With a recession looming, we wanted to share our tips for not just surviving, but THRIVING during the downturn. We know that many investors will hunker down for the long winter and stay on the sidelines, but not members of our community. Many have been waiting for the downturn. They know that more millionaires are created in down times compared to the good times. They know that this crazy seller’s market is coming to an end, and there will be opportunities all around to start investing in real estate during the recession. So how do you take advantage of these opportunities and thrive? Here are our tips for doing just that!
[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
This post contains affiliate links, which means that if you choose to make a purchase, we will earn a commission at no additional cost to you. Please do not spend any money on these products unless you feel you need them or that they will help you achieve your goals.
The dreaded “R” word.
I even debated whether or not to use it in the article’s title. While we aren’t technically in a recession, it sure feels like it’s the beginning of one.
Recessions are bad enough, but combine them with inflation, and it’s enough to strike fear in many people’s hearts. Why wouldn’t you be scared?
The economy is slowing down. Which means fewer jobs and more unemployment.
If you’re lucky to have a job, you know that salaries are going to stay flat or maybe even go down. Add to that, the pain of high inflation. Which means the money you make buys you less and less.
If you’re close to retirement, a lifetime’s worth of savings is declining in value. The 4% rule isn’t going to cut it when the cost of living is going up.
Recessions Don’t Have to Be Ugly For You
Real estate investing is an excellent hedge against inflation. That’s assuming that you’re making more money with real estate investing than the rate of inflation.
So how do you stay ahead of inflation? And how do you take advantage of the opportunities that are available to you during a recession?
The bottom line and the key takeaway of this article is – there’s a lot you can do, but you have to do it even better than before.
Here are our tips for doing just that!
Tip #1: Don’t Buy Good Deals, Buy Great Deals
It’s been a seller’s market for nearly a decade.
For those who don’t know what this means, a seller’s market is where there are many more buyers than there are properties for sale. This gives the seller the upper hand and makes it much more difficult for buyers to buy good deals.
Many of the investors in our community have learned how to buy good deals in a seller’s market. They’ve learned both the mindset and strategies needed to succeed in a hot market when so many other investors have given up, but what used to be a seller’s market has shifted.
Sellers don’t have the upper hand anymore.
So what does this mean for you? It means that it will be easier for the average investor to get a good deal and start investing during the recession, but in today’s inflationary environment, a good deal isn’t good enough.
If you want to stay ahead of inflation, you’re going to have to go for a great deal.
I don’t know that there’s a definition out there for a “great deal,” so I’m going to make one up. A good deal is getting a property at a price that is 5-10% below market value. A great deal is getting a greater than 20% discount.
How Do You Get a Great Deal?
One way is to offer the seller less than it’s worth. This is ineffective in a hot market because it’s unlikely that the seller will accept a low offer when there are other buyers lined up to offer more. In a recession, the likelihood that the seller accepts a low offer goes up significantly.
So, for the veteran investors out there, you can be more aggressive about putting out low-ball offers. As we go into the recession, there will be more and more desperate sellers out there. The key is to quickly adapt to the changing environment and do things differently. Don’t act like it’s still a seller’s market.
Another way to get a good deal is to negotiate. This is a skill and just like any skill, you get better at this over time with experience. Members of our investor community commonly get negotiated discounts. Some have gotten >20% discounts in a hot market!
So imagine what you will be able to do in a recession. I wouldn’t be surprised if our investors are able to get 30-40% discounts in the near future.
Tip #2: Force Mucho Appreciation
OK, so living in Puerto Rico has rubbed off on me.
But my point should be clear. Don’t just force appreciation. Force A LOT of appreciation.
For those who don’t know what I’m talking about, forced appreciation is one of the best ways to grow your wealth with real estate. It’s when you intentionally increase the value of your property. It’s different from market appreciation because you control it. You can force appreciation when you increase the income of the property.
Many have heard the story of an 8-unit property I owned during the 2008 recession. During the low point of the recession, I was able to force appreciation from $740,000 to $920,000 in one year by raising rent and increasing the income.
Many of the investors in our community have been doing an incredible job forcing a ton of appreciation, but I’m going to put the challenge out there to you guys.
Force even more appreciation. Make this a MUST. Don’t settle for small amounts of forced appreciation.
Recognize that there will be even greater opportunities during a recession to find deals that will allow for forced appreciation. Leverage the relationships you’ve built and find the best of the best deals out there.
They are out there, you just have to first, believe that they’re out there and second, believe that you can get them.
For those who are new to real estate investing, there’s still time to get in the game. If you want to short-cut your way into the game, consider taking our upcoming Zero to Freedom real estate investing course.
Tip #3: Don’t Just Lower Your Taxes, Pay Zero Taxes
What do people do when there’s runaway inflation? They cut spending and reduce their expenses.
What’s the number one expense in your lifetime? Taxes.
So, it makes sense to pursue strategies to lower your taxes. Real estate, more specifically, investing in rental properties, is one of the best ways to do this.
In times like this, don’t just settle for lower taxes. Completely eliminate them instead.
How do you eliminate your taxes? By leveraging the different tax strategies and with careful planning.
What we do is set aside time at the beginning of each year to look at our taxable income and come up with a plan for sheltering that income.
We determine the strategy we’re going to use, whether it’s with long-term rentals, or short-term rentals, or a combination of both.
We also work with a great real estate CPA. If you don’t have one and you’re investing in real estate, you’re going to need one. If you want to work with one of our recommended CPAs, CLICK HERE for a referral.
Tip #4: Focus Even More on Relationships
Those in our community know the value of relationships. If you’re new to investing, you might be wondering, which relationships?
With real estate agents? Lenders? Other investors? The answer is, all of the above.
Real estate agents are one of the most important sources of deals. If you want to get the very best deals (the great deals described above), you are going to need to be at the top of your agent’s list.
How Do You Build Great Relationships?
The way to get to the top of their list is through relationships. Who are you more likely to help, people you have a relationship with or the stranger on the corner?
Building a relationship with a lender is also one of the most important things you can do. Ideally, before a recession starts. Lenders are your source of funding for deals. During recessions, lending tends to dry up because of the increased risk. However, they’ll still lend to their best customers. These are the people who pose the lowest investment risk. They are more likely to perceive you as a lower investment risk if they know you and have experience lending to you.
How about other investors? Having access to a community of investors is invaluable. Our community members are starting to collaborate together on deals. They find a larger multifamily property for example and pull together a couple of other community members to buy the property. So imagine getting access to not only great deals but bigger deals. It’s not difficult to find great deals when someone else brings you a great deal.
Those are just a few examples of the value of relationships. There are so many other relationships that matter during a recession. Your relationship with your contractor for example. Relationships with property managers are another.
So, stay focused on building relationships with all members of your team. As well as a community of other investors. This is true during any economic cycle but it’s especially important to step this up during a recession.
Tip #5: Take Your Mindset to the Next Level
In our opinion, this is the most important tip on this list.
However, we put this one last because most people reading this will value strategy more than mindset. They want to learn the techniques, tips, and tricks to thrive during a recession.
The problem is, strategy only gets you so far. Real estate investing is full of obstacles and challenges. Add to that the pervasive fear that comes with recessions. Either of these things can slow you down and worse, stop you dead in your tracks..
So imagine making a costly mistake. Then on top of that, hearing that the “sky is falling” and everyone around you telling you that you’re crazy for investing in real estate during a recession.
This is where you’ll need a strong mindset. To ignore the naysayers and stick to your guns. To overcome any mistakes you might make.
The investors in our community understand that much of your success with real estate investing and in life, depends on your mindset.
So you might be wondering, how do you “work on your mindset”?
The best way is to surround yourself with other people who are working on their mindset.
Seek these people out. They aren’t hard to find. From there, learn from them. Lean on them when you run into an obstacle. Most importantly, enjoy the journey.
Final Thoughts About Recessions
Remember that recessions have created more millionaires than the good times. The ones who become millionaires aren’t the ones who sat on the sidelines. So don’t just read this article and file it away.
Make a decision that you’re going to take action, then go out and do it!