The No. 1 Piece of Advice for New Investors in a Recessionary Economy

So, you’re a new investor and it looks like we’re entering a recessionary economy. Congratulations! When there is uncertainty in the markets, there is opportunity. In this article, we’ll take a look at the number one piece of advice I’d give to a new investor right now.

Do you know the future? Me either. So don’t get caught up in the news, what people are saying, doing, or advising (maybe even including me!). Stay the course. Do what has worked for investors since the beginning of time.

As the billionaire industrialist Andrew Carnegie said, “Ninety percent of all millionaires become so through owning real estate.”

And he said that over 100 years ago! Many more millionaires have been made in the last century through real estate. So let’s dig into what needs to be done in the current market to set you on the path to becoming a real estate millionaire.

In a nutshell, my number one piece of advice is to know your fundamentals. Let’s take a look at why that’s critical to your success.

Master Your Fundamentals

If you follow any professional sport, you’ve probably heard coaches say (especially after a loss) that it’s time to get back to the fundamentals—not the high-level strategy of the game, analyzing opponents, or getting on the latest fad diet to improve performance.

No.

Instead, they go back to the fundamentals of the game. The basics. The tried and true. It’s just as important in real estate (and probably more so because it’s your money on the line).

So, what are the fundamentals when it comes to real estate investing? Good question. In my opinion, no matter what asset class you invest in, there are four fundamentals that are always needed.

1. Finding Deals

The number one thing every real estate investor is looking for! At our bi-weekly meetup, countless people bring up the types of deals they’re looking for (and a lot are looking for the same thing). I get messaged all the time about good areas to invest in or where to find the best deals. If you search the Forums or Facebook groups, you’ll see this over and over and over again: “I’m looking for a deal in such and such location.”

Now is the time to pick your niche and your strategy for finding deals. Maybe it’s small multifamily in a neighboring college town and the strategy you’ve landed on is direct mail marketing. Or maybe you like three-bed, two-bath ranch homes in the town you grew up in. Your strategy might be to use your existing network to find deals.

There are many niches and countless strategies to find deals. Now is a great time to figure this out for yourself. Explore the forums and see what’s out there!

2. Analyzing Deals

Another fundamental you need to master is analyzing deals. This may sound difficult to a newer investor, but it’s not scary, I promise.

If it’s a rental property, you need to break down income and expenses. Income refers to the rents your tenants pay. Expenses are things like maintenance, capital expenditures, vacancy, insurance, financing costs (more on that in a minute), and utilities. The BiggerPockets Calculators are incredible when it comes to organizing these numbers.

If it’s a flip, you need to know the ARV (after repair value). This is the most important number to know, with the next being your rehab budget. Then you can work backwards and know how much you can pay for the property. You’ll also have carrying costs (insurance, utilities, hard or private money costs, taxes, etc.) Again, the calculators on BiggerPockets are super helpful.

When it comes to analyzing deals, practice makes perfect, so make sure you’re analyzing a lot of deals. You’ll get better and faster over time. Eventually, it becomes second nature.

And, as you analyze deals, you’ll learn your market even better. You’ll start to pick up on trends. This is really important right now, as no one is exactly sure how the current economy will react over the next year or two.

3. Financing Deals

Right now, the lending environment is in flux to some degree. But the fundamentals of financing have been pretty consistent over a long period of time. Let’s break down a few options.

Traditional Financing

The typical down payment plus bank financing. For most new investors this probably looks like 20–25% down.

Private Money

With private money, you borrow from a family member, friend, or acquaintance. You agree to terms (get everything in writing!) and you’re on your way.

Hard Money

I don’t recommend hard money for new investors, but it’s worth knowing what it is. It could be useful to you in the future.

Essentially, it’s asset-based lending at a higher expense to the borrower. Typically you’ll still need skin in the game plus you’ll pay points (each point is equal to 1% of the amount borrowed) and you’ll be on the hook for interest-only payments until you sell or refinance the property.

I’ve used hard money for flips, but again, I don’t recommend it as a strategy for new investors.

Seller Financing

With seller financing, you agree to terms directly with the owner of the property. They act as the bank. It’s an awesome strategy if you can find it.

4. Managing Deals

This is a critical fundamental that trips up a lot of people. You may be perfect on the first three, but if you mess this part up, you can get in a lot of trouble.

Managing deals includes managing a project (such as a rehab) and longer-term management such as finding good tenants and dealing with turnover.

One of the best ways to find a deal is to find a tired landlord or homeowner who is sick of maintenance, managing bad tenants, or dealing with evictions. Good management goes a long way to making sure your first three fundamentals don’t go to waste.

Many newer investors may want to manage the property themselves. This is fine as it allows you to learn all aspects of property management. But there is nothing wrong with hiring a good property manager. In fact, it’s my preference (but we also own 28 units).

Patience Is Your Friend

Finally, be patient. We aren’t sure exactly how everything is going to shake out in the coming months. Luckily, you’ve got time to put into mastering the fundamentals. As you master them, be on the lookout for opportunities. Good luck and be safe!

What’s your best advice for investing during a recession?

Share your tips in the comments below.

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