Wednesday, November 30, 2022

Real Estate Investing: Preparing for Recession

 


“Where there is no vision, the people perish…”

Proverbs 29:18

 

Well, we started with a Bible verse, so it’s a good time to go into the story of Joseph in the Bible (located in Genesis 41). 

 

To paraphrase, Pharoah, the leader of Egypt, had two dreams that no one could interpret.  His chief cupbearer (and a former jailbird) remembered that he knew a guy in the joint who had (successfully) interpreted dreams for him and his buddy a few years back.  He told Pharoah about this Joseph guy and Pharoah had him sent for. 

 

Joseph said God had revealed both of Pharoah’s dreams to him and they had the same message; Egypt and the surrounding lands would have seven years of incredible plenty followed by seven years of devastating famine.  He advised, “Let the Pharoah look for a discerning and wise man and put him in charge of the land of Egypt.  Let Pharoah appoint commissioners over the land to take a fifth (20%) of the harvest of Egypt during the seven years of abundance… This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt…”

 

He concurs and appoints Joseph to head this newly created post and things go as predicted.  Egypt is the only place that has food when the years of famine come, and Joseph is administering it on Pharoah’s behalf.  The Egyptians and the people of surrounding lands are forced to sell Pharoah all their possessions and land just to get food. 

 

To bring this back into the realm of real estate investing, landlords are clearly in the time of plenty as property values and rental prices have been on a growth curve for the last ten years.  To boot, interest rates have been historically low (and really still are) which allow for low borrowing costs and has made for a robust sales market.  Many landlords have used this as a time to sell some of their “dog” properties, make improvements and raise the rents on their existing properties, buy some new ones, and refinance/eliminate debt.

 

Recently, interest rates have more than doubled and many economists (none with divine inspiration like Joseph to my knowledge…) claim a recession is around the corner.  If that’s true, the housing market could take a sharp correction which could be a great opportunity for prepared investors.

 

I have vague recollections from the last housing correction from 2008-2012.  I did not buy any investment properties then; I was too concentrated on keeping my existing rental homes afloat as rents were low during that time period.  I remember that selling homes was really hard; buyers were scarce!  Many sellers were just giving their houses back to the bank or using “short sales” as the banks would take a loss on part of the loan during the sale.  I remember thinking, “What’s wrong with me?  As a wanna-be real estate investor, how am I not buying homes now?  These houses are going for a steal and they seem to be all over the place!”

 

The thing that was wrong was that I could not get a decent loan and did not have much cash on hand.  So, I needed to sit on the sidelines like most other people until the economic waves grew more favorable.  But the buyers who were prepared got some great deals!

 

The investment challenge now is to be more like Joseph and be prepared for any possible famine while things are favorable.  If the right investment comes along during any upcoming recessionary period, I’d like to be able to snap it up (while simultaneously staying solvent during any prolonged economic slump).  Preparation now can pay huge dividends later.

 

Happy Investing & Landlording!


No comments:

Post a Comment