POST WRITTEN BY
Ralph DiBugnara
President of Home Qualified
April 9th, 2020

 

Recession

The recession phase is the result of over-inflated growth. We enter a declining market where prices, jobs, rental demand, and new construction plummet. Default rates on mortgages, loans, and credit cards increase. Businesses close, unemployment rises, and foreclosures increase. We will eventually hit rock bottom for this cycle, where prices for real estate will be at their lowest. Housing prices and rental rates decrease rapidly as housing demand is reduced and supply is increased. Unemployment rates and defaults increase. Many businesses shut down. Spending halts as people try to save what they can in a moment of panic. This is when pricing will likely be the best. If you are liquid and have available capital, you could have the opportunity to purchase properties at extremely deep discounts. This is the cycle where people can change their financial circumstances. The biggest opportunities are in value-add. Buying non-performing mortgages, REOs, short sales, or other types of distressed sales. Not having enough capital reserves or liquidity. When a homeowner or investor sells real estate during a recession at rock-bottom prices, it’s typically because they need money. They did not have enough capital reserves, stable assets, or liquidity to ride through the economic downturn.
Indicators of recovery
Home sales and leasing are flat. Over time, there is slow upward growth for both rentals and property sales. Very little new construction is being built. Interest rates tend to be either declining from rate cuts or holding steady at low rates. Emotions are often fear, panic, and depression. Eventually, over a period of several years, as the market slowly recovers, emotions become more positive and hopeful.

Opportunities

Typically, low-interest rates. This is normally a great time to borrow on new real estate acquisitions or refinance a property you may already own. If you can get a lower interest rate and shorter term, you can eliminate your debt at a faster rate. However, bank lending is often restricted post-recession and bank financing may not be an option. For that reason, having liquidity means you will have funds available to buy investments during this period. Buying properties below value. This is a great market to find value-add properties that you can sell for top dollar in the next real estate market cycle or hold for long-term cash flow. Having liquidity is the number one way to take advantage of this cycle. Without the available cash to invest, you could be sitting on the sidelines when price and opportunity are at their best. The sooner you can identify the recovery period, the better!

Risks

While there are always risks in any investment and any market, when a market is recovering from a recession, the purchasing risk is greatly mitigated because prices tend to be at a deep discount. Always conduct thorough due diligence on each asset you acquire — and don’t buy an investment just because prices are low, make sure the numbers actually work. Vacancy rates are typically high and rental rates are often low in this period. If you already own assets, this could mean you have to hold on to an asset longer than anticipated. Having liquid cash can keep you from going under during this time as you wait for the market to recover.