The idea of buying your first investment property can be nerve-wracking, even at the best of times. If you’re a seasoned investor, buying investment properties in a recession can come with a lot of uncertainties.
The good news is that you can make some of your best investment deals during a recession. The bad news is that they can come with higher risks than normal.
In this post we’ll get into understanding the real estate market today, and what you can do to stay safe and profitable in your investments.
We just moved from a Seller’s Market to a Buyer’s Market
First, let’s understand these two terms:
In a Seller’s Market, there are more real estate buyers than sellers, which pushes the demand higher than supply of available houses, resulting to higher real estate prices. This benefits the sellers.
The reverse happens in a real estate Buyer’s Market – the available homes for sale exceeds the number of buyers looking to buy houses. This over-supply drives the real estate prices down.
Over the last 10 years we’ve been in a seller’s market and sellers have been enjoying high prices for their homes.
The Covid-19 pandemic has pretty much shut the real estate down, and most economic activity as well. Even though we are not in a recession yet, we are very likely to have one in the next few months to 2 years.
When prices go down, it’s time to go shopping.
The pandemic has already created a buyer’s market, and we should expect this to continue for a while as the economy re-opens.
As time goes by, we can expect to see more and more properties becoming available for sale.
While this will present some big opportunities, here are some things to remember:
1: Just because it’s discounted doesn’t make it a good deal
Buying investment deals in a recession can get tempting. There’ll be lots of properties on the market. Some will look like good deals and even offer tempting price cuts. But that doesn’t necessarily make them good deals.
You have to do good due diligence to make sure the numbers make investment sense.
Stick to your investment plan. Crunch your numbers. There’ll be a lot of pressure to act quickly and close those deals. Don’t rush!
It’s easy to get swept by low prices and eager sellers – make sure your numbers make investment sense. It’s only a good deal if all your numbers work.
2: Buying investment properties in a recession can be risky
Even though the prices will look tempting, it won’t always be obvious what the future holds. What will be the value of the house in 2 years? 3 years?
If you’re renting it out, will the rents stay stable or go down? Will it keep a positive cash flow?
Nobody can really tell the answers to these questions. So, you need to buy low.
Buy low enough to cushion you for the unpredictable future and you’ll be safe.
3: Make many offers
Did you know you can be making several offers every day?
Did you know you can also put more than one property under contract even if you can’t afford to buy all of them?
When you find great deals that pass your due diligence, don’t let them go if you can’t handle them all. You can wholesale the property and still walk home with some good money.
Then you can keep the ones you can afford.
4: Be patient
Don’t be in a rush to close deals thinking the good deals will soon be gone. A recession lasts 1-3 years, and there’ll be plenty of time to buy as much as you want.
Moving in too quickly can make a great looking deal go South especially if your due diligence misses some important details. These can turn costly.
It makes more sense to move slower, be detail-oriented and buy properties that will keep your investments profitable.
5: Stick to your investment plan
The abundance of investment properties in the market at low prices can cause confusion. If you’re doing some good marketing, these great deals can be popping up every day.
Stick to your budget. Stick to your plan. Don’t get swayed by some hot looking deal outside the state that looks too good to pass up.
One deal at a time!
There’ll always be better deals than the one you have. If one meets all your criteria, go for it first, before jumping on to the next one.
The worst thing you can do is to keep second-guessing the ones you already have.
Stick to your plan, or you may end up with nothing.
One reality of buying investment properties in a recession is that you can always negotiate lower.
Banks have all these properties they need to unload. There’s a solid chance they’ll take your offer.
If you’re buying from a motivated seller, they are under pressure to sell, before they lose their home in foreclosure. If there’s room to negotiate lower, do so.
Make many low offers, and see which ones will be accepted.
I usually get surprised even in a seller’s market when some of my low-ball offers get accepted. Always do your homework, and you could surprise yourself with some sweet deals.
7: Be ready for low rents
If you’re renting out properties, be aware that renters may not be able to afford as much as they did before the recession.
This means you might have to lower your rent.
When buying your investment properties in a recession, allow for 10-15% lower rents than normal.
Also, when a tenant moves out, you might have a longer period of vacancy. Allow for this in your calculations and you’ll be safe.
8: Keep some cash reserves
Just as it’s important to make sure the property cash flows, keep some extra cash to cater for repairs, especially if your financial situation changes.
It’s exciting to own some properties that are cash flowing nicely, but pay attention to your extra cash reserves.
Ultimately, if you follow these few tips, buying investment properties in a recession will reward you nicely.
You’ll be able to ride the wave if you pay attention to details. You’ll find it’s probably wise to go slow but safe.
At the same time, don’t sit on the sidelines hoping to get some super deals. Get to work, hunt, and good luck!
Remember you’re buying at an incredible time when you call the show!
Buying investment properties in a recession – Your take
Obviously buying investment properties in a recession will be lucrative, and you’ll probably do some of your best deals during this time.
As long as you remain careful, do your homework and due diligence and buy low, you’ll probably make some good money.
What’s your take on this? Please comment below.