5 Ways the Next Recession Can Make You Rich

by | BiggerPockets.com

It’s been all over the press in the past year: After a record-breaking 2015 for real estate, the recession’s coming — and it’s coming soon.

Sam Zell, the real estate billionaire, has predicted recessions in the past, and when he starts selling, a downturn isn’t far behind.

Billionaire George Soros preaches economic apocalypse to anyone who will listen. (“We’re repeating 2008,” he says.) Meanwhile, new president-elect Donald Trump said last year that the next recession’s already here.

Despite the dark forecasts from billionaire trail blazers, grim as they may sound, every cloud has a silver lining — and a recession is no different.

Brad Pitt’s character in The Big Short [Image via: https://youtu.be/EqjrWefjkUk?t=9m14s]

In fact, the best deals come from the 3 Ds; deaths, divorces and defaults — three things that spike in any recession.

“That’s where you get the best deals,” Neil Patel, a rock star entrepreneur, internet master and real estate investor, told me recently.

Sure, it may not bypass everyone’s moral compass; however, the fact remains that one man’s misfortune is another man’s BALLING!

Now that we’ve got the conscience out of the way, let’s look at the opportunity. Here are five ways — including the 3 Ds — you can prosper from a recession, much like the crew from the hit movie The Big Short.

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 3% interest rates on home equity loans, you don’t really need the world’s greatest cap rate to expand your portfolio.

3d

But if you’re looking for deals, simply look through the lens of 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.

recession

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 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 “3D” 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 BP investors out there, one man’s heartbreak is another man’s “hallelujah!”

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 possibly has gained a fortune over the past 20-25 years — a very common scenario in markets like Brooklyn and Queens.

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

“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.

interest-rates

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 3D’s — deals that will add serious commas to your portfolio.

Investors: 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!

About Author

Philip Michael

Philip Michael is the founder of New York Equity Group (NYEG), a 12-man investment company with $5M in assets and $25M in investor capital under management. When he’s not buying real estate, Philip moonlights as a TV/radio personality (Fuse, SiriusXM, Fox Sports) and hosts events and seminars to help young professionals build wealth through real estate. Follow Philip on Twitter at @Philip_Michael.

11 Comments

  1. Christy Greene

    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.

  2. Jerry W.

    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.

  3. Mitch Larrivee

    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.

  4. 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.

  5. Rob Cook

    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.

      • Rob Cook

        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!

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