Real Estate Investors Beware: The Talk of Recession

There’s been an awful lot of talk about the recession in the news. The fact that the media starts talking about a recession is what makes people react and stop spending, which is what puts us into recession. What does that mean to us as real estate investors? This is the time to take charge of your financial life. Don’t leave your future in the hands of a job. Here’s what I think is going to happen now. As people start to spend less money, employers start to get nervous and start to have cutbacks. You are going to start to see layoffs all over again. It may happen at your job. You may also get restructures. I grew up with depression era parents and I always believed in working one job your whole life. You start there and you stay loyal. That just doesn’t hold true anymore. Today’s employees can’t afford to be loyal to only one company and companies aren’t always loyal to their employees. As soon as they need to rearrange their financials they lay employees off regardless of how long they have been with the company. You need to be prepared for that. When I worked for American Express, we had a 140 year tradition of never laying anybody off. Then we got a new CEO and we were laying off people about every six months. What I told my employees was it’s no longer the old days. You have to make yourselves prepared for the inevitable. What if you got laid off tomorrow?

Now to me, I think we are all in the best situation. We control our financial destiny. With real estate investing you can set yourself up so you don’t need a job. I’m not saying go out there and quit your job today. What I am saying is get prepared. Have your real estate investing business going solid so if something happens to your job tomorrow it’s not going to be a problem for you. When I finally made the decision to quit American Express it was because I was making more money doing part time real estate then I was making as a senior manager with American Express. I was literally begging them to lay me off. Give me one of the packages and of course they wouldn’t lay me off. I was in a situation where I was ready for them to lay me off. Are you in that situation?

Now what else does this upcoming recession mean to us from a real estate investing perspective? What you are going to find is that sellers are going to be even more motivated. We are already in a tough market right now from a seller’s perspective. There are not enough buyers for the number of homes that are on the market. The sub prime problem has put an awful lot of houses back on the market. You have buyers now that can’t get loans because the sub prime loans have gone away. Add to it the fear of this recession, and there are going to be fewer buyers in the marketplace. Sellers are going to be even more motivated to sell, and will get to the point of desperation. Watch the prices as they continue to drop. I think that by the end of the year going into next year we are going to see it start turning around. For the rest of this year the prices are going to continue to fall. Keep an eye on that and as you are buying your properties make sure not to value them at today’s value but rather where they will be at some point in the future. Then value them at that lower after repaired value so you can still sell. Again I have said this before “it is not that there are not buyers out there, it is that there are more houses for sale than there are buyers”.

If you want to sell your house make sure you are priced at least in the middle to the bottom of the pack of comparable houses. Basically, offer the nicest house on the market for the price with amenities. The only way to be able to do both of those things is to buy the house correctly up front. You need to do a lot of marketing so that you are bringing in great deals. Now with the sellers being even more motivated you’ll be able to find these fantastic deals where you can turn them around and sell them. If you want to wholesale right now, your investor buyers are more cautious than they have been in the past which means that they are really going to be looking for a good solid deal. Don’t bring them a marginal deal. Don’t bring them one where you show that the return of the after repaired value of the house is at the high end of the market. Show them that you have a solid deal, that you have even anticipated where the prices are going to be by the time they are ready for market. Show them how great a deal you are offering. If you are going to rehab there will be plenty of buyers for your house because you are giving up a great house and a great price on the market. That’s the way to survive in this marketplace.

For those of you who can stay in the game and are not looking for immediate cash flow, I really believe rentals are going to be a tremendous way for you to build wealth. What you are able to do right now is to buy property at an all time low. You are going to see prices in your area falter unless you happen to be in an area that is growing. For the most part prices are dropping so buy up property if you can and hold onto it. In another year to year and a half you are going to see those values start to shoot up. What you are going to hear people saying in about five years is “Oh, if only I could have bought property in that sub prime period back in 2007 and 2008 I’d be rich today”. Well here’s your crystal ball, buy it now and be able to say that five years from now. Once this crisis is over money is going to flood back into the marketplace. Buyers are going be ready to go because they have been held back for so long. All these sellers that have lost their house are going into rental properties. They will be there a year, two years, and then they’re going to want to look for a house again. The sub prime candidates of today can’t get a house because the sub prime loans have dried up. If you can afford to buy properties and keep them on as rentals you will find that your wealth is going to significantly start growing in the next year and the year after that.