Real estate investing and the upcoming recession??

Question

What are your thoughts on real estate investing and the potential upcoming recession all media outlets are talking about?

Steven Foster Wilson · Answer

I am not worried. People are always going to need a place to stay. Here in Columbus, we have a housing shortage. With all the huge corporations we have here like Amazon, The Limited, and Intel moving here it will just continue to grow.  If I hold out on waiting for a recession or waiting for prices to drop then I will miss out on great deals that are in front of me.

Simon Ashbaugh · Answer

I wouldn't worry. I think people say that comparing it to 08' but that was a completely different situation. I think rental rates will stay steady if not rise. Columbus Ohio for instance has tons of big companiesss like intel and others so we will have plenty of jobs for a long time.

Russell Brazil · Answer

Rents often rise during recessions as the rent cycle is counter cyclical. Less people buy real estate with lower consumer confidence, leading to more renters, and thus upward pressure on rents. Plus rents are already exploding with the current upward inflationary pressure.

Steven Goldman · Answer

@Juan David Maldonado     A good deal is a good deal regardless of the general economic situation. Likewise, the same goes for a bad deal. Do your due diligence and  surround yourself with a strong team including, relators, lenders, managers and accounting. Your team should have experience in investor real estate. Your money guy should  do pre offer analysis of your deals. Do not buy a property unless you know how you are going to get the money to execute. Make sure your out is solid. If you are holding that includes a understanding of the cash out refinancing. Good luck.

Bjorn Ahlblad · Answer

My properties are all rentals and I'm in it for the long haul, so not particularly concerned. I think some people may have paid more for a house than they maybe wanted to but that happens. Media began talking heavily about the 'coming recession' in 2016 as I recall.

Chris Webb · Answer

There is an excellent video out there by @Dion McNeeley on why it doesn't really matter what happens in the pending recession. Take a look and let me know what you think on this YouTube Video.

Doug Pretorius · Answer

@Juan David Maldonado I'm excited for the first time in years! I sat out the pandemic boom because I'm a creative finance cash flow investor. Even the most motivated sellers could sell in hours for hundreds of thousands more than they paid. So there was nothing for me to do.

Real estate all across Canada has been hit hard, harder than I anticipated. Many markets are down 25% or more from their highs in March 2022. Interest rates have more than doubled from their pandemic lows. And the federal government just announced that they're backing a rent-to-own program. This tells me that we're going to be in a buyers market for the rest of the decade.

Sub2, contract for deed, wraps, seller financing, and lease options are going to be the order of the day for years to come. As you can tell from the tone of my post I absolutely live for this stuff!

Wale Lawal · Answer

@Juan David Maldonado

Whenever pessimism dominates the U.S. economy, commercial real estate investors should be prepared to shift their positions. With inflation at 40-year highs, interest rates rising and monetary tightening underway, there seems to be a consensus that the nation is heading toward a financial downturn.While the likelihood of a global recession is not certain, commercial real estate professionals need to take the long view. This means that changes in the short term may be necessary to avoid ending up on the wrong side of the balance sheet. Here are five ways that commercial real estate investors can prepare for the looming recession and protect their bottom lines.

1. Keep decent liquidity.Cash will be king when banks freeze up on lending. This doesn’t necessarily mean keeping large amounts of cash on hand—lines of credit should suffice. This way, you keep your assets but also have access to cash when needed, helping you stay afloat and cover any cashflow shortfalls while enabling you to take advantage of buying opportunities.One should remain mindful that when things get tough, some banks historically have chosen to shorten or outright close lines of credits if they perceive borrowers as high risk, even if the account has zero balance or is otherwise fully performing and current. When setting such lines of credit secured by real estate, I recommend doing so with lenders with whom you have no other loans and avoiding those you typically use for traditional commercial lending. This will reduce the chances of your credit line getting frozen when you need it most.

2. De-leverage.The number one reason people lose assets and get wiped out during recessions is high leverage and not enough liquidity. If you have $100 in assets and $70 of debt (70%), I’d rather see you sell 50% of your assets and pay down your debt so that you have $50 in assets but only $20 of debt (40%). Your equity position doesn’t change (it will still be $30), but during a downturn, I recommend keeping leverage to no more than 50%—ideally 30% to 40%. From past experiences, it seems to be a magic number to avoid leveraged assets getting in trouble—in actuality or on paper—and help you avoid lenders calling in covenant defaults, which will ultimately lead to the loss of an asset.

3. Refinance any upcoming or maturing debt.Make sure balloon payments on your debt are at least five—and ideally seven to 10—years out so you can weather the downturn. Your assets may go vacant and potentially into covenant default over the next five to seven years as the economy goes through recession and recovery. Ideally, you should refinance any debt with non-recourse debt and negotiate covenant default provisions upfront. Most lenders don’t want to own your properties, so having no personal guarantees on a loan will strengthen your negotiation position and improve your chances of reaching a workout agreement if you do get in trouble.

4. Avoid spec projects.Defer any major undertakings that will be capital-intensive, that project an exit strategy over the next two to three years, or that have debt otherwise maturing over the next four years. Remember, people lose even fully performing Class A assets during recessions for no other reason than that banks freeze lending and owners are unable to refinance when the underlying debt matures.If you are in the middle of such projects, I recommend you finish them up as quickly as possible or consider putting them on hold. You don’t want to be scheduled to deliver a major ground-up construction project in the middle of a recession one to four years from now. With that said, I don’t believe we will see dramatic changes in the economy before December due to the upcoming elections, so you probably have time to get out while you can. But once the midterm elections are over, I think we’ll see a lot of blood in the water.

5. Focus on recession-proof investments.Personally, I would avoid investing in buildings that are or will soon be obsolete, such as mobile home parks, older industrial buildings with low interior ceilings, multifamily in tertiary markets and office spaces with small wall-to-window ratios and lower ceilings. I would also avoid bigger box retail as consumers and retailers move to e-commerce. Instead, consider focusing on recession-proof assets such as medical offices and flex/small bay industrial that cater to service industries—maybe some in-line, service-based retail or grocery-anchored centers.Remember, the industrial, retail and office space worlds are changing. What was once considered the gold standard (suburban office space, indoor malls, etc.) are becoming dinosaurs. Be smart and don’t become extinct along with them.The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Good Luck!

Doug Pretorius · Answer

@Juan David Maldonado If the seller owns the property free and clear then you just negotiate the best terms you can for them to hold the mortgage. Low or zero interest, no balloon, low or nothing down.

If the seller already has a mortgage then you need to find out how much it is and what the terms are. Then you can buy subject to the existing loan or do a wraparound mortgage. If they're not motivated enough to hand over the deed then you can do a contract for deed.

You should not purchase on a lease option in this scenario because you shouldn't do rehab (even light) on a property you only have an option on.

Linda Labbe · Answer

a good deal is a good deal just be careful when you run your numbers and know your markets

Real estate investing and the upcoming recession??

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