Real Estate News & Commentary

5 Ways the Next Recession Can Make You Rich

Expertise: Personal Development, Real Estate News & Commentary, Real Estate Investing Basics
41 Articles Written
dictionary entry defining the word recession which is highlighted in pink

In light of the COVID-19 pandemic, many foresee a recession on the horizon—while others contest it’s already here.

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“The pace at which all of this is happening is unprecedented. In 2008, it took 274 days for the stock market to enter the dreaded ‘bear market’ territory. It took 24 days to enter a bear market now,” The Washington Post reported.

Despite the dark forecasts from economists and Wall Street experts, every cloud has a silver lining—and a recession is no different.

5 Ways the Next Recession Can Make You Rich

1. Leverage your equity.

In other words, don't splurge or buy yourself that new car you've wanted. Sit on that equity. Sitting on your equity allows you the luxury to take out a cheap home equity loan to deploy to another investment.

With 6 percent interest rates on home equity loans, you don’t really need the world’s greatest cap rate to expand your portfolio. Although you also want to ensure you’re buying properties that make sense. Run your numbers, and don’t do “eraser math” to make a property fit.

Also, if you’re looking for deals, simply look through the 3D lens I described above.

Related: 3 Tips for Recession-Proofing Your Real Estate Investments

3d

2. Take advantage of defaults.

It’s often a cause and effect thing. As we saw during the last downturn, when the economy tanks, people lose their homes. Sometimes it’s the other way around…

But when the market plummets, properties can be yours for pennies on the dollar. Once the market recovers—which it historically has always done—you not only have a good cash-flowing property, the value is “back to normal,” and you cash in on the recovery.

Oh, hell yeah.

3. Keep an eye on divorces.

According to Forbes, divorce rates go up when the economy goes down, with economic uncertainty putting a strain on once-happy homes. And when couples split, the assets have to be divided evenly, opening up opportunities for shrewd investors.

It happens a lot, says Earl Antonio Wilson, a Brooklyn-based lawyer, who handles various three “D” deals in the New York City area. “With divorces and settlements, you sometimes have to liquidate fast—especially to satisfy court rulings on net worth splits you may not necessarily have in cash.”

Fortunately for you savvy BiggerPockets investors out there, one man’s heartbreak is another man’s “hallelujah!”

Related: 3 Types of Motivated Sellers (& How to Win Deals By Solving Their Problems!)

4. Help with the fallout from deaths.

With deaths, there’s often an overwhelming amount of emotions to deal with, as well as a mess of heirs not knowing what to do. Sell? Keep? Split?

Oftentimes, the property is older, may be the family’s free and clear, and has possibly appreciated a boatload over the past 20 to 25 years (a very common scenario in markets like Brooklyn and Queens, where I invest).

Say the property has three heirs and is probably worth $850,000 on the free market.

interest-rates

“It happens all the time,” Wilson says. “If the heirs never owned the property in the first place, a $250,000 payday for each may be just what the doctor ordered to help mend the loss.

“And funerals aren’t free, either. And neither are lawyers. Those costs have to be covered.”

5. Watch for lower interest rates.

It’s almost counterintuitive; you’d think if the market plummets that banks are wary of giving frivolous lenders money.

But that’s not what happens. Remember, markets are dictated by simple supply and demand. And banks need to lend you money to make money on their money. So when the economy is down, the opposite tends to happen; interest rates go down.

Think about it: People don’t want to lend money when they don’t think any money exists. This offers great opportunities for both savvy and rookie investors. Now, the lower your cost of capital, the easier you can bolster that debt yield ratio (NOI/mortgage note) and get approved.

And if you prepared for the downturn by boosting your FICO score and keeping a nest egg for a down payment, you can find tremendous deals from any of the three “D”s—deals that will add serious commas to your portfolio.

Do you think a recession is headed our way? Any strategies you used in the last recession that helped you financially?

Be sure to comment below!

A native of Denmark, Philip came to New York in 2014 with $79 in his PayPal account. In 2015, he joined Bisnow Media (the largest commercial real estate news source in North America) and helped lea...
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    Christy Greene from San Diego, California
    Replied over 3 years ago
    I have quite a few real estate agents who are my clients and I always ask them what the market looks like based on what they are seeing and hearing. Inventory is low where I am and the buyers that are buying are the first time home buyers who don’t have a lot to put down. I am waiting and being patient for as I am hearing the same thing regarding a down turn coming. Real Estate is about patience. I am willing to wait.
    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 3 years ago
    Just keep in mind that acquisition is great, but you must keep cash flow up. Jobs can get scarce and if you are not cash flowing well a minor setback could put into having to sale at a loss. I wish so badly that I would have bought 10 more houses when I bought my primary residence, I would be retired now. I had to struggle to buy just one home. I do not plan to let opportunity pass me a second time.
    Mitch Larrivee from Orlando, Florida
    Replied over 3 years ago
    As an agent and wholesaler I know the market is changing without a doubt. However, the links in this article related to a looming recession are over a year old. The fact is that there are still more buyers than the market can absorb. Thus prices are being driven up (aka seller’s market). We’re between cycles so I see the next 6 months to a year holding growth. After that I expect a correction or small recession. It won’t be as obvious as the Great Recession, but if you’re watching the market you will get some great deals.
    Jace Perry Developer from Coeur d'Alene, ID
    Replied 22 days ago
    “The pace at which all of this is happening is unprecedented. In 2008, it took 274 days for the stock market to enter the dreaded ‘bear market’ territory. It took 24 days to enter a bear market now,” The Washington Post reported.
    Josh Solomon from Woodbridge, New Jersey
    Replied about 2 years ago
    Good call, Mitch!! It’s been a little over a year since your comment and the market went up. I believe we are seeing the beginning of the decline. Let’s hope it’s not too severe but yields some freat deals!
    David Todd from Lake Forest, California
    Replied over 3 years ago
    Setting the possibility of a correction aside, is there a best month to purchase in? Are there months that sellers are motivated to sell?
    Declan Kaster from Ayr, Ontario
    Replied over 3 years ago
    Christmas.
    Erin K. Professional from wooster, OH
    Replied over 3 years ago
    In my experience, when cold weather is coming up (at least in cold-weather states) – I have 4 properties under contract right now that were people who decided to hurry up and sell because they didn’t want to pay utilities for vacant properties for the winter.
    Eric Christians from Fargo, ND
    Replied over 3 years ago
    Nothing beats having to shovel snow to make a path to a house yourself (as a buyer) because the sellers have given up on selling. I love cold winters with lots of snow. Best deals in February after the house has been on market 3 months & sellers sick of paying heat.
    Nancy
    Replied over 3 years ago
    Hello Philip, Unfortunately, what go up must come down. So, the answer to your question is yes at some point we will face a recession. However, if we use at least two of your suggestions we (real estate investor) will be fine – exactly better off than the normal citizens.
    Rob Cook Real Estate Entrepreneur & Coach from Powell, Wyoming
    Replied over 3 years ago
    I specialize in buying properties that “nobody” wants to, or can buy. So the sellers are automatically vulnerable and can become desperate and flexible/motivated. Some of the reasons properties may be difficult to sell: 1) if they have a mobile home involved – cannot qualify for FNMA mortgages – so only cash buyers are in the game, 2) they have incomplete construction projects involved – lenders do not want to be in the RE business from foreclosures let alone contractors!, 3) structural issues which scare off buyers and lenders – almost anything can be fixed, often simply and inexpensively, 4) Frankenstein houses which have a layout deficiency which can be corrected – e.g., 4 bedroom houses with a single bath, or a kitchen upstairs, or stupid floor plans like having to walk thru one bedroom to get to another bedroom – most buyers cannot get past these issues and do not have the funds, capability or interest in fixing the deficiencies and 5) houses whose condition is just so filthy and cluttered that buyers cannot see past it – and sellers are not willing or able to clean it up for sale. Add to this all the 3D’s as discussed. I have done deals in ALL of these and many other situations. Be smart and firm and solve distressed sellers’ problems and you can get incredible deals. I have often obtained seller financing in these situations too, as a bonus to the deal.
    Jerry Bredesen Real Estate Investor from Plymouth, Wisconsin
    Replied over 3 years ago
    Completely agree Rob. The best deals necessarily come with a major problem – something that others see as a deal breaker. As long as it’s correctable of course.
    Rob Cook Real Estate Entrepreneur & Coach from Powell, Wyoming
    Replied over 3 years ago
    Yes Jerry. I spent hours reading a post about IRR and the author’s assertion, mathematically, that one should “Never buy $30K pigs” and it made me think about a lot of issues and business models. It was amazing how many commentators were people who were apparently doing very well with the very low priced rentals, with rents below $700. And the main culprit when this model fails is CAP Ex. It is rare to actually find and be able to capture great deals that nobody else recognized or valued. Often the chickens come home to roost, when large expenses are incurred for big component replacement. But, that brings to mind several key points to my process. 1) Who cares if it is hard to find them, how many do you really need? I have 3 years worth of work for myself already lined up on renovations and construction on deals I already bought! 2) Being extremely picky and selective of deals, looking at MANY and passing on 99% of them is the key to success. 3) make sure the defects are curable, as you said, not unfix-able things like location! 4) It pays best when there are actual problems with the structure beyond mere painting and cleanup – many can assume those tasks. We want things that the average prospective buyers cannot take on, like change of layouts to overcome stupid floorplans, within the existing footprint (NOT additions which never pencil out). I literally can buy properties all day long, for HALF the cost of a new construction property which produces the same rent. I am a builder, so I consider this all the time! And it quickly gets real – buying old houses and buildings makes you rich. Buying new ones makes you “feel better” but eliminates profits. Another key to my success and program, is that I actually WANT to buy myself jobs. I am not a hands off, armchair “investor” like so many seem to be proud of in these forums. I get more satisfaction from making deals and then doing all of the work on them myself, literally, than I do in any hands-off business/investment model. Know yourself and be true to what makes YOU happy and you will probably succeed. People talk about buying JOBs in rental property acquisitions instead of being a “true investor” in what I can only say is a arrogant attitude. If they are full time “Investors” then their JOB is owning real estate, right? So, the ONLY thing that really matters beyond satisfaction, is MONEY. What makes a RE operator the most money? For 99.9% of the players in our game, that is doing what I do, hands on involvement on smaller properties. I retired when I was 39 with a multi-million$ net worth, then went to law school for a hobby and Graduated in 2000. In the middle of law school, started buying lots of VERY low income rentals and renovating them myself! In one neighborhood, I bought and renovated 5 row houses over a 2 year period, all bought for under $35K. I put an average of $30K materials and labor fixup into each unit and rented them for $1,200 a month tenant paying all utilities. The last one I sold, which I bought on the courthouse steps (for real!) for $32K, renovated and rented it to the SAME section 8 tenant for 6 years at $1,200 a month with virtually NO maintenance at all done, sold and closed in 3 days once the tenant finally moved on in her life. Sales Price = $325K. Yeah, I am an investor, BUT I like getting my hands dirty. It is my edge!
    Fred Adadjo
    Replied 22 days ago
    Wow!! This is really cool! I'm trying to emulate this model of RE investing as well!
    Jose V. from Alvin, Texas
    Replied 22 days ago
    Wow it really sounds fulfilling!
    Sue Alonso
    Replied over 1 year ago
    Everything that goes up, must go down! These suggestion are great.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 22 days ago
    I saw a chart once of Warren Buffet's returns and it was with the market during expansions and then skyrocketed during recessions. He stays cash rich and ready to pounce when a recession hits. That's a lesson for everyone out there.
    Vaughn K. from Seattle, WA
    Replied 21 days ago
    I don't trust stocks at all... But someday, when I have a bigger pile of cash to risk, the one and only time I may buy into the stock market is specifically during crashes. Even if it goes down further after you decide to buy in, if it's already burned off 20-30%+, that's a lot of room for making easy profit when it returns to normal. One of the first things I was thinking when this all kicked off was "Buffett is going to make A KILLING by deploying all that cash he has stacked up now." And so he will.
    Stephen Steric Real Estate Investor / Agent from Simi Valley, California
    Replied 22 days ago
    100% agree Andrew, we can learn a lot from the past. I’ll be interested to see how everyone feels about this article now with everything that’s happened this month (March 2020)
    John Murray from Portland, Oregon
    Replied 22 days ago
    Same old story buy when others are selling and sell when others are buying. Fear from loss and greed are the drivers of human emotion. Hey the Feds just dropped the overnight to near zero. Guess what your next financial move will be? Mine is refinance and hold on to equities. This must be the hindsight updated version of 3 years ago.
    Alexandra King Real Estate Agent from Santa Barbara, CA
    Replied 21 days ago
    >>>>Sure, it may not bypass everyone’s moral compass; however, the fact remains that one man’s misfortune is another man’s BALLING!<<<< Well, if your math is as bad as your English, and your heart is as black as it appears, then your advice is dubious. I went to many of the Guru classes during the recession and saw greed and chicanery at it's finest hour. And, as a real estate agent, I see your type all the time. Example: We have 400 sq. ft. studio's being rented for $3,500 in Santa Barbara to visiting nurses. Who pays the tab? the hospitals. And where do the hospitals get the $$ to pay the rent? Their patients and, of course the insurance companies. Death, divorce and foreclosure are inevitable, but greed and sociopathy, well these are learned and, sadly, inevitable as well. There will always be people who take advantage of other's misfortunes. It's the dark side of capitalism and it is what spurs communism. There is another option to others' hardship: Help them. But, that would take a conscience.
    Selina Chambliss from Puyallup, Washington
    Replied 21 days ago
    The whole tone of this article is disturbing to say the least. I understand that some some economic impacts are inevitable and I’m not saying that I’m not positioning myself to eventually purchase additional properties, but to celebrate other people’s devastation is beyond greedy and deplorable. Your no better than the people hoarding sanitizer and masks for those who need it.
    Michelle Salcedo
    Replied 12 days ago
    I don’t particularly celebrate people’s devastation but the tone of this article definitely doesn’t make me feel bad either. Who feels bad for us young people having to pay insane high rent! 4K-5k for RENT for old small homes that are complete tear downs in my area and many other places! People who purchased homes for $200k selling for $900k (not even been remodeled). I hope the market crashes! How could it be that we have amazing jobs, savings , excellent credit and it’s still not enough to purchase a decent home that doesn’t have a pink tub for the 50’s !! I don’t feel sorry for anyone! Palm beach gardens, FL.