Considering the fact that it was real estate that started the ball rolling toward economic disaster in the first place, it’s rather ironic that it is in real estate that investors really have the opportunity to capitalize on economic recession and turn what could be a potentially devastating economic downturn into a major opportunity for profit. Why? Because real estate is one of the major assets whose value is plummeting in the face of a never ending stream of foreclosures and bankruptcies, and it is real estate whose value is guaranteed to go up when the recession is over.
Think about it. Will there ever come a time when real estate isn’t a desperately needed asset? Absolutely not! People are always going to need places to live and places to work, and because of that there will always be a need for real estate. That’s why a huge percentage of entrepreneurs are jumping on board the real estate bandwagon to grow wealth and increase their net worth. It’s one of the only markets out there that’s guaranteed to never become obsolete!
A major contributor to the current economic crises and the fact that major players like Freddie Mac and Fannie Mae are going under is the huge number of people defaulting on their mortgages. When the concept of interest only loans and other special programs designed to help those individuals who otherwise would never qualify for any type of mortgage purchase a home first came out everyone thought it was a great idea-and in many ways it was. It placed the power to purchase property in the hands of people who otherwise wouldn’t have the ability to do it, and it sent banks into raptures as more and more people came to them for assistance in buying or refinancing their first home.
Then reality struck. The bottom line is that many of these homeowners weren’t able to get a mortgage in the first place because they didn’t have the means to repay it, and while for some people the programs worked like they were supposed to (interest only loans for first time homebuyers still trying to find their niche in the workplace, for example, who later became responsible citizens and were able to shoulder the increased burden of their mortgage payment when the time came to begin making payments on the principle) others just found themselves going farther and farther into debt.
Skip ahead six months to a year, and suddenly a huge percentage of these homeowners are defaulting on their loans. Banks are foreclosing left and right, and they’re struggling to get rid of these properties as quickly as possible to get them off their records. Each property goes to a foreclosure auction, where it sells for less than it would have outright at fair market value, and the bank barely reclaims its investment.
Fast forward a little farther, and suddenly huge quantities of people are out of jobs as the economy continues to slide. You have a huge pool of homeowners whose income, once strong and steady courtesy of major manufacturers and/or the United States government, is now no longer sufficient to meet their financial obligations. They can’t pay their mortgages that they took out when their resources were more than sufficient to meet their needs, and the bank has to foreclose on those properties as well.
The real estate market is plunged into chaos, property values are falling rapidly in an attempt to stem the tide of destruction sweeping from coast to coast, and clever investors are rubbing their hands together in glee.
During an economic recession homebuyers simply aren’t buying homes. They’re pumping their money into other things. This inspires desperate homeowners to put their homes on the market for far less than they’re actually worth in an attempt to make a sale that will be adequate to allow them to pay off the bank and be free of the mortgage default hanging over their head.
Enter the real estate investor. They soothingly placate the homeowner, assuring them that of course they’re there to put everything to right. They contact the bank to let them know that they will be purchasing the property so that the bank can halt any legal foreclosure proceedings they may have initiated, and then they pay the happy homeowner and send them on their way, holding the deed to the property.
This process is repeated over and over again every day during an economic recession, particularly once that recession has begun to have a positive (or negative, depending on how you want to look at it) effect on the value of the housing market. It’s not at all unusual for a clever investor to find a homeowner who has built up some equity in their home and who will gladly sell it for a fraction of the cost it would go for on the open market.
In dollars and cents, it means that it’s not at all unheard of for an investor to purchase a $350,000 home for under $200,000 during an economic recession. The value of the property has fallen so far and the homeowner is so far behind on their financial obligations that they are willing to let the property go for a song just to dodge the stigma of bankruptcy or foreclosure that would otherwise be lingering over their heads.
After the investor has the property in his hands he has a choice. He can either choose to turn right around and sell it to a rehabber or private homeowner. He can hold on to it, rehab it himself and rent it out (since affordable rental property will be highly in demand in the face of the rapidly failing housing market, with hundreds of families ousted from their homes and left to find another place to live), or simply sit and hold on to it.
As an investor during an economic recession it’s vitally important that you understand the basic framework of a recession. THE RECESSION IS NOT GOING TO LAST FOREVER! Sooner or later the economy is going to start getting back to normal, and when it does the value on your investment is going to rise back up. That $200,000 home is suddenly going to sell for $350,000 again-more if it happens to be in an area that sees a tremendous boom as a result of the ending depression.
That means that if you can afford to do it, the best thing you can do at this point is play a waiting game. You know the value of your property is only going to rise, and if you rehab it while you’re waiting you can watch the value rise even more. Let’s take that $350,000 house and use it for an example again. Let’s assume for a moment that the house is sitting on a lightly wooded lot with a big backyard an easy commute away from a major, booming industrial area.
Let’s also assume that the industrial area saw a major boom as a result of the ending recession, and that because of that boom property values in the area were jerked back up. That house that was worth $350,000 and sold for $200,000 is suddenly worth $400,000; however, while they were waiting for the end of the recession the homeowner also took the opportunity to rehab the property, doing some landscaping, adding a pool and a spa room and installing all new plumbing and appliances.
Suddenly that property that the investor bought for $200,000 and invested $40,000 to fix up is worth over $500,000. Even with the additional $40,000 investment for the rehabilitation the real estate purchaser is going to walk away with a tidy $100,000 in their pocket-more than many executives make in two years, and all because they were clever enough to take advantage of an opportunity when one presented itself on the back of an economic recession.
If you’re looking for a way to take advantage of the recession and you have the time and the money to do it, I strongly recommend real estate. The good thing about real estate is that if you know the ins and outs of the business you can enjoy a return from this career whether you choose to think in the short term or the long term-although, for the sake of this book, I’m going to encourage you to put at least a little bit of thought into the long term.