What New Investors Should Know About Buying Their First Property in a Recession
Buying your first investment can feel nerve-wracking. Like with anything new, there is a learning curve.
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The good news is that during a recession, you can make some of the best deals of your investing career. The bad news is that it is not guaranteed.
Real estate investing always has an element of risk, and it is crucial to look at the basics of investing first and set the stage for the current real estate market.
Buyer’s Market vs. Seller’s Market
For the past 10 years, we have experienced what is known as a seller’s market. A seller’s market is a market condition characterized by a shortage of goods available for sale, resulting in pricing power for the seller. It occurs when a low supply meets high demand.
During a recession, the market turns into what is called a buyer’s market. A buyer’s market refers to a situation that is the exact opposite, in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations.
Since COVID-19 has come onto the scene, real estate transactions have slowed, but many areas are still seeing lots of sales at stable prices. Most experts would agree that with the world somewhat shut down, it kind of feels like a recession. But the truth is we are not there yet.
Since the market is due for a correction and many parts of the economy have yet to resume “normal,” a full-blown recession seems imminent in the next six months to two years. We will then be in a buyer’s market, and it will be time to go shopping.
Things to Remember
While buying in a recession creates a unique opportunity, there are some things you should be aware of when purchasing your first investment property to increase your chances of having a positive experience.
Just Being on Sale Doesn’t Make It a Good Deal
Have you ever gone to the store and picked up a bunch of extra items that you never intended to buy just because they were on sale? Maybe you bought a used car for a considerable discount only to find out the transmission needed to be replaced three months later?
There will be many real estate opportunities for investors—now and likely for the next few years—but you need to make sure that the deal works by doing your due diligence.
Stick to your plan. Get inspections, crunch your numbers, and stay on track with your strategies. There can be a lot of extra pressure to act quickly in a recession, with many investors on your tail if you can’t make a deal fast. Do not be pressured into a rush decision.
Always, always, always (did I say always?) do your due diligence and inspect. It is easy to get swept up by low pricing and an eager seller, but it can cause you to overlook details. It is only a good deal if all the numbers work and you can execute efficiently.
Get Comfortable With Protocol
Did you know you should be making several offers a day? Did you know you can get more than one offer under contract at a time, even if you cannot afford all of them?
When you get a property under contract, it means you have the right to sell that piece of property or buy it for the negotiated amount of time. If you get more than one accepted offer, you have a few days to do your inspections and decide if you want the deal.
You can also wholesale the property by selling the contract to someone else. Let's say you get a property under contract for $50,000. The ARV is $100,0000 after $20,000 of repairs. Someone may offer you $55,000 for the rights to that deal. You would make an easy $5,000 for finding the deal, locking it under contract, and then selling it to another buyer.
When you act as the middle person in an agreement this way, you are known as a wholesaler. Depending upon the spread, wholesalers can make anywhere from $5,000-$30,000 or more on a property. Going through a wholesaler to find your deals in a recession could also be a way to pad your savings.
Don’t be in a rush to get a deal done so you can move on because you are afraid all the good deals will get swept up. A recession in real estate usually lasts for one to two years, so you want to make sure you wrap up the initial agreement well. A deal is only successful once it closes and the flip is complete or the renter moves in with a check in hand.
Moving too quickly can make what was once an excellent opportunity go south. It makes more sense to move slower and be detail-oriented as a new investor, because a deal is only as good as its execution. There will always be more deals out there.
Remember Your Original Plan
The abundance of properties for sale in a recession can make it very overwhelming to make a decision. It is essential to go back and review your original plan. Where did you want to invest, and how much was your budget originally?
Don’t get swayed by a friend calling you about a deal in another state that is too good to pass up if you already have your plan in place. It is OK to pivot, but it may start inhibiting how well you are able to oversee the deal.
If you want to understand how to focus, read The One Thing by Jay Papasan and Gary Keller or listen to BiggerPockets Podcast 113: Becoming a Millionaire Real Estate Investor Using The One Thing with Jay Papasan.
Know that while some deals are better than others, if one meets all your numbers in a preferred location, go for that sale. One of the worst things a new investor can do is fall into the trap of waiting for a better deal or second-guessing the one they have.
Stick to your plan, or you may get stuck doing nothing and buying nothing.
In a recession, banks are taking over properties and sellers are often in a situation where they need to get out quickly. This means you have a solid chance to have a lower offer accepted.
Buying under value is one of the significant advantages in a buyer’s market. Since there will be lots of properties for sale, you can make several lower offers and see which is accepted. Always do your homework on a property to see if competitive offers are coming in on a deal you want. Sometimes the Realtor will tell you, and it will affect the price of your offer.
Be Aware Rents May Decrease
While you can often get a better deal on a property in a recession, renters may not be able to afford as much as they could for rent when the economy was booming. It makes sense that if people are struggling for work and the job market is weak, tenants don’t have as much cash to spend.
It is essential to keep this in mind when you are projecting rents for a buy and hold. In a recession, calculate rent at 10-15% less than it was a few months ago. If a tenant moves, vacancy losses may increase, as well, and it may take longer than usual to fill the unit.
Keep Cash Reserves
It is so exciting to start owning property, but pay extra attention to your reserves on hand. Your tenants’ job stability isn’t the only thing that may be vulnerable. Make sure that the property cash flows, and you can afford repairs if your financial situation changes.
Over time, buying real estate will be the best thing you can do for your financial security, but you have to be able to ride the economic wave of ups and downs. In a recession or otherwise, you want to pay attention to details. You may find that it takes longer to make a decision and close a deal because you are taking extra precautions, but ensure you make one and do not sit on the sidelines thinking about it.
Remember, you are buying at an incredible time! Many congrats in advance.
Have you invested during a past recession? What did you learn?
Share your tips in the comments below.