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4 Tips for Investing in Real Estate During a Recession
Dated: August 25 2020
For real estate investors, waiting for the market to stabilize is usually the way to go. But considering the current pandemic, stabilizing could take some time. And with so much real estate opportunity on the horizon (and currently), waiting may not be something you want to do.
If this sounds like you, here are four principles to help guide you through real estate investing during a crisis.
1. Be Patient
It's an unfortunate expectation, but with recent unemployment, it won't be lone before we see homeowners foreclose. As an investor, you need to be patient and be more selective.
Wait for a property with a large profit margin and can withstand a possible hit in resale value (more on that below). There are still many uncertainties about the market, so now is not the time rush into a new deal. Methodically analyze your options with the largest margins before committing.
2. Cost Analysis
Property analysis is the pillar of every investment strategy, especially in crisis times, when properties should be analyzed with elevated costs and risk factors. You want to avoid taking on that deal that "broke the camel's back." Keep in mind that lenders will be doing the same. It's natural and smart to be more conservative during this time.
Here are some changes to investments you might expect to see when applying for an investment loan:
- Requiring a proven track record of investments
- May require a higher credit score
- The property must be located in a proven investment area.
It's essential that you also be aware of the "falling knife" concept. This is when property prices free fall. During a crisis, it makes it more difficult to predict if or when this will happen. The best thing you can do is purchase when prices appear to have bottomed out, not while they are still dropping, and buy when the property can withstand at least a 10% drop in repair value.
Your ability to liquidate a property quickly is vital. But that may not be possible in the current market. That's why you want to analyze the property as both a "fix-and-flip" as well as a rental. Consider focusing on properties that have rental comps to give you multiple exit strategies should you be unable to liquidate fast.
The recession will hit some areas harder than others, and the areas most and least impacted can vary depending on the crisis. In other words, just because one area thrived during our last recession does not mean we'll see another boom in that area during this one. However, some key factors can help you determine which areas are good for investing:
- Abundance of government and military jobs.
- Large businesses that can withstand economic fluctuations
- New projects and developments underway
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