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Is Your Real Estate Business Ready for Another Recession?

by Michael Zuber on July 23, 2012 · 2 comments

  
recession preparation

The typical definition of a recession is two consecutive quarters of negative GDP growth. I predict and expect that both Q3 and Q4 FY 12 will show negative GDP growth with a strong possibility that Q1 FY13 will also be negative.

So what is an investor to do if they see another recession coming on the back of 3 years of slow growth after the ending of the “Great Recession”?

I believe that successful real estate investing is about understanding local markets and local conditions. However, there are certain macro trends that every investor should pay attention to, and a recession is at the top of the list.

Given that I see a national recession coming, one might ask, what I am doing in my business?

First, I am beefing up my cash reserves.  This will allow greater flexibility as we head towards the end of this year and the recession kicks in.  If the recession begins as expected, the press will start getting very negative around October.  When the press gets negative, the average buyer/investor typically gets nervous and doesn’t want to do deals.  When I see this, I will jump in and pick up several deals that I would have normally missed because competitors will spend more than me in good times.

Second, I am watching rental trends.  Rentals have been hot, especially single family homes in my market.  I suspect that if the recession commences, apartment type rentals will increase in popularity while single-family homes might get a little soft.

Third, I expect the Federal Reserve to push back their time period for raising interest rates.  Currently I believe they are expecting the earliest increases in late 2013.  I believe we won’t see meaningful interest rate rise until 2015-2016 as the world needs to deleverage and low interest rates help this process.  This means that private investors will be very interested to learn about returns earning 10% secured by repaired and leased properties. Said another way, private money investors will be actively looking for solid returns with proven methods.

Finally, I will be looking for larger deals with which I can construct win-win structures with the seller.  Perhaps I will find a 10-20 unit apartment at a steep discount and set up a deal in which the owner carries back 20-30% of the purchase price, ensuring that my out-of-pocket cash is reduced.  I have found that owner-carry-back deals have the most success during recessions during which time the seller knows they need to be flexible to get a deal done.

What if I am wrong?

Fair question, as it happens all the time.

Let’s say we continue to grow at our current rate of 1-2% a year.  Let’s also assume that rental real estate stays hot, we have really hit bottom, and we are about to kick off the next boom in investment properties.

If this happens, it will mean that I have a large cash cushion, as I am not currently buying anything given my expectation for a recession.  It will also mean that the portfolio of properties I have bought over the last couple of years will become a lot more valuable.  As the value rises, I will once again have the opportunity to sell my single-family homes and leverage the equity into small apartment buildings via a 1031 Exchange.

In the end, I am getting ready for a double dip recession, but if it doesn’t come, I am ready to enjoy the ride of appreciation.

Good Investing

Photo: F Delventhal

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{ 2 comments… read them below or add one }

Al Williamson July 24, 2012 at 11:36 pm

Mike,
Can’t say I disagree. But I only track one indicator – unemployment. Looking for unemployment to dip so I can bump up rents. The Fed, GDP, etc. are all noise to me – my ears only perk up for unemployment news.

Am I wrong about that?

Reply

Mike Z July 29, 2012 at 2:48 pm

Al

For me unemployment is a micro # and one I focus on for my area of investing. Meaning I care about the trend in employment in my market a lot more than the national unemployment rate. While GDP is a great Macro # that helps for shadow what might be coming to my local market.

Good Investing

Reply

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