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Updated over 5 years ago,
How to Survive and Thrive When The Recession Comes
Every week, it seems like there is a "recession is coming!" post on BP.
And honestly, the discussion is sometimes irritating. You have some people who wish the next recession comes and there are some people who don't think the recession is coming. It's not really productive and there seems to be more "economists" on BP than in a small country.
So, instead of speculating if a recession is coming soon, let me share with all of you HOW I actually THRIVED in the last recession and more importantly, how YOU CAN PREPARE for the next one.
I would like to call on experienced real estate investors who survived 2008-2009 and share how they survived or even thrived and what they think others should do to prepare for the next recession (if and when it hits).
How I Survived AND Thrived During the Last Recession
When the recession hits - mortgage lending both for investors and end-buyers virtually stopped. Even if you have perfect credit and 20% downpayment, it seemed like no one wanted to lend to you. For commercial properties, they have this crazy thing called "Mark-to-Market" where mortgage lenders were calling on loans on performing commercial properties where their values dropped considerably. They were foreclosing on performing loans - crazy!
So since no one was lending, the only one buying were investors who have cash or private capital.
I was lucky. I have private capital.
When I lost everything in early 2000s, my credit was so bad I couldn't get a mortgage. So I had to buy using private money and creative/owner financing. So when the recession hit, I bought deals when no one could.
Also, everyone traded down (in terms of their lifestyle). So people who used to own houses in "A" areas become renters in "B" areas or even apartments. It was hard to find renters in A and B houses in 2005-2007 but it became a landlord's paradise back in 2008. Everyone it seemed - wanted to rent. For the first time in a long time, occupancy increased but rents did not increase until after a few years later.
Again, I was lucky. Most of the properties I own have section 8 tenants and government subsidized housing. I own properties in "F" areas (war zones) and C & D areas. So, my cashflow did not go down unlike landlords in A areas.
Because of access to private capital, I started getting houses - dirt cheap - even in A and B areas. I also bought non performing notes at a discount. That was paradise for me since I could literally open the MLS and virtually all the deals were great deals. I also bought a ton of shortsales back then.
To be honest, I wish I could say I was smarter than the investors who lost their shirts in the last recession but I was not. I was lucky. I have the resource - private capital - to buy when no one could. I have properties in C, D and F areas that were not really affected by the recession. In fact, they become better when the hard times hit.
So based on what I've learned, how do you prepare yourself for the next recession?
How To Survive & Thrive in the Next Recession
1. Don't be equity-rich but cash-poor - so have enough CASH. In every property you own right now, you need to save enough operating reserves and capital reserves. What is enough is up to your risk tolerance and factors like the age of the property, its ease or difficulty of being rented, and the tenant base it attracts.
2. Establish a track record now so you can attract PRIVATE CAPITAL. You need to be ready when mortgage lending dries up. Or if you have the track record but no private capital, network like crazy to attract private investors. Even if it means giving them a higher interest rate or a bigger share of your profit than you would like, do it. You want to at least establish relationships with private money investors.
3. DIVERSIFY your portfolio - don't buy just A's & B's. Be open to buying C & Ds and get into the section 8 program. My portolio now is 50-50 market-section 8. At the right price and with the right property management company or property manager, low income housing can be profitable and it's recession proof.
4. SELL your underperforming properties now and raise CASH, lots of it. Or if you don't have a lot of properties, WHOLESALE properties to raise lots of cash now while the market is hot. Wholesaling is not illegal - but you have to do it right. [please don't make this into a wholesaling debate post!]
5. Learn owner financing & shortsales because you're going to do a lot of them when the recession hits.
6. Establish relationships with local banks and credit unions. In the next recession, those local banks and credit unions might sell you tapes of non performing loans.
I see a lot of investors who are saying they are NOT buying in this market because they are waiting for the next recession. BIG MISTAKE. They have been saying there's a recession as far back as 2013 and had you listened to that advice, you've lost out on a lot of opportunities. A smart investor once told me:
"You can buy & sell real estate in any market, but how you buy and sell will depend on the market."
7. So BUY properties NOW - but pay a reasonable price in sub-markets in your area that are up and coming. I only buy apartments where I KNOW I can increase the rents with low cost cosmetic upgrade of the units. This is a recession-proof strategy because the increased cashflow and property value is a good buffer.
8. If all you've done is flip properties at this point, start buying rentals (or invest in apartment syndication deals if you hate landlording) while focusing on flips that are shorter-term. You need to have some passive income coming in and not just rely on capital gains from flipping. Also, with short-term flips (not 12-24 month extensive remodel but 3-6 month flips), the chances you'll be stuck with a house you can't sell when the recession hits is lower.
9. Get the longest mortgate term with the lowest interest that you can afford on your personal and investment properties. You don't want the 3/1 ARM for example. What if they increase the interest rates after 3 years? Or if the recession happens and you can't refi (because lending dries up), now what?
10. Be FINANCIALLY DISCIPLINED. Pay off debts, save, invest, earn cashflow, save and invest some more. You have to prepare not just your properties for the recession but personally as well. So have 6 months of household living expenses saved up. If and when the recession hits, you will be OK.
I hope the above is useful to people and more productive than another "recession is coming!" post.
But of course, we can't stop the amateur economists here on BP in showing us their "crystal ball" isn't it?