How to Prepare For A Recession in Real Estate
Lots of people have a question. Is it possible to make money in recession in real estate?
During recession, most people are in fear, they think the sky is falling, it’s the end of the world. They sell their houses because the house prices go down. But rich people knew that great recession equal to great opportunity. What would you do when house prices crash if you were the rich people? You are absolutely correct! It’s to buy more! When house prices rise to a certain level, you should stop buying instead. Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
The Economic cycle
Economic cycle is like season cycle. There are total of four seasons; Spring, Summer, Fall and Winter. Four seasons are in order. It never goes Spring, Winter, Fall then Spring again. In other word, seasons are predicable, same as Economic cycle. The last great recession ended in 2009. The one before that is 2001. There are a lot of people don’t’ think the market will ever crash again. It is like someone tells you that he/she doesn’t think winter will ever come again. No more winter forever. Recession comes every 8 – 10 years, that’s the fact that has proven from the last few hundred years. You rather prepare for a recession as an investor or crash with a recession as an average consumer. Regardless real estate or stock market, you would crash with a recession if you don’t have a correct recession proof investment strategy and protection plan. On the other hand, if you prepare for a recession, understand all the game rules and know how to play around them, you will make a lot of money from a recession.
How to prepare for a recession.
What if you just bought a house, then recession hit. What shall you do? Most people would choose to sell the house imminently before the house price goes even lower. This is very common during recession. Everybody around you and the news talk about how bad the economy is. The environment makes everybody fear. Because of the fear, everybody is selling, that makes the housing market crash even worst. As an intelligent investor, we can’t follow the mass. We can’t let the fear impact our decision making. So, what if you just bought a house, then recession hit. What shall you do? The secret is, buy it right. If you buy it right, you don’t need to worry about recession what so ever. If you buy it right, recession is in your favor. Let’s say you buy a house at a decent location. 2 miles away from Walmart, school and highway. You can always find tenants for this house because people always need shelter no matter the market is up or down or upside down. Think about that, lots of people lost their home. Where are they going live? They are not going to live on the street. The only way is to rent. During recession, the rental market is actually going up because there more renters and less rental homes on the market. Let’s assume you buy the house for $200,000 and rent it out for $2,000 a month. Deduct all the expenses and mortgage, your cash flow is $1,000. Then recession hits, the house is currently worth $100,000. As an intelligent investor, you don’t sell the house. Instead, you let the house product income for you every month. Regardless how much your house currently worth, your rental income still maintains the same. Your cash flow is still $1,000 a month. Let’s think differently, the house worth $200,000 before recession, now it is 50% off. If we prepare for a recession, this is actually a great opportunity.
In conclusion. We need to recognize recession happens every 8 - 10 year. To prepare for a recession we need to stop following the mass and be fearless. The most important thing is, buy it right.