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5 Ways the Next Recession Can Make You Rich

Philip Michael
3 min read
5 Ways the Next Recession Can Make You Rich

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

“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 describe below—defaults, divorces, and deaths.

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.

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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!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.