Recession-Proof Real Estate Investing: How to Survive (and Thrive!) During Any Phase of the Economic Cycle

By J Scott

Prepare for a market shift by learning to modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride, and never be intimidated by a market shift again.

The 2008 Great Recession was a time of economic turmoil and disruption, and many real estate investors lost everything they’d worked so hard to achieve. However, not every investor suffered that fate: Even during the worst parts of the downturn, some real estate professionals were able to grow and scale their businesses. Not only did they come out the other side unscathed, but they also created a better financial situation than ever before.

In Recession-Proof Real Estate Investing, accomplished investor J Scott dives into the theory of economic cycles and the real-world strategies for harnessing them to your advantage. With clear instructions for every type of investor, this easy-to-follow guide will show you how to make money during all of the market’s twists and turns—whether during an economic recession or at any other point in the economic cycle. You’ll never look at your real estate business the same way again!

In this book, you’ll learn:

How our economy works, and how to make it work for you

The four major phases of the economic cycle: Expansion, Peak, Recession, and Recovery

How to know when economic shifts are likely to occur and strategies to withstand those impending changes

The positive and negative impacts of each phase on different real estate investing strategies

How to continue profiting during every point in the economic cycle

Multiple ways to modify your investing tactics—not only to survive economic downturn, but to also thrive!

• Language: English
• Publisher: BiggerPockets
• Release date: Feb 7, 2019
• ISBN: 9781947200197

J Scott

J Scott spent much of his early career in Silicon Valley, where he held management positions at several Fortune 500 companies, including Microsoft and eBay. In 2008, J and his wife Carol decided to quit their corporate jobs, start a family, and focus on real estate investing. In the past ten years, they have bought, built, rehabbed, sold, lent-on and held over $60M in property all around the country. J is also the co-host of The BiggerPockets Business Podcast and the author of four books on real estate investing—including the best-selling pair The Book on Flipping Houses and The Book on Estimating Rehab Costs—which have sold more than 300,000 copies combined and have helped investors from around the world get started with real estate. J currently lives in Sarasota, Florida.

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PREFACE

The original manuscript for this book was written in 2017 and 2018 and published by BiggerPockets in 2019. At the time of its writing, the market felt like it was on the verge of change. We had seen unprecedented growth after the 2008 recession, with nearly ten years of economic stability and—for the most part—prosperity. But there were a lot of indicators that an economic slowdown was imminent, and many investors I knew were starting to consider that changes were on the horizon.

Less than a year later, the coronavirus (COVID-19) pandemic hit. At first, this seemed to be the nail in the coffin for the huge run-up of home prices and the steep gains of the stock market. And, for a few months, it was.

During the spring of 2020, property values plummeted as people were locked down in their homes. The stock market dropped 30 percent nearly overnight. Unemployment skyrocketed. If you were like me, you probably assumed that what was coming next would make the 2008 recession look mild.

Turns out, we were wrong. While there was economic fallout for many, the markets recovered quickly. And drastically.

Home prices shot up to levels we’d never seen before. The stock market rallied to recoup its losses and add another 10 to 20 percent gains. Cryptocurrencies like Bitcoin shot up five-fold in a matter of months. Millionaires—and billionaires—were made overnight.

However, as we saw leading into 2021 and 2022, every action has an equal and opposite reaction. In this case, the opposite reaction was supply shortages and crippling inflation. The availability of things like furniture, cars, baby formula, and building materials dwindled. And the price of everyday goods—from gas to food to lumber—shot through the roof. We were getting richer through our 401(k)s and investments; yet we were struggling through our everyday lives.

I’m writing this updated preface in June 2022, as I watch what may be the end of the post-COVID-19 financial frenzy. The stock market is starting to struggle. Housing inventory is up, with buyers making fewer sight-unseen offers far above asking price. Cryptocurrency is no longer the rage. And, in general, economic confidence is at a low point not seen since the beginning of the COVID-19 crisis.

If the past two years have taught me anything, it’s that I can’t predict what’s next. Will this economic slowing lead to a recession? If so, will it be short-lived or will it rival the crash of 2008? Or, perhaps, is what I’m seeing here in June 2022 just another blip on the economic radar, and the party will continue?

If nothing else, this is a good reminder that none of us—including the most brilliant of economists—can predict what’s next when it comes to the economy. Even ignoring black-swan events like the pandemic, there are simply too many variables at play for any of us to have a crystal ball to discern where housing prices, or the stock market, or cryptocurrency, or any type of investment is likely to be months or years from now.

It’s also a good reminder that economic shifts don’t just happen randomly. Cause and effect is at play. The better we are at knowing where to look, and what to look for, the better we will be at determining when a shift may be coming, and in which direction. Nobody could have predicted exactly when and how COVID-19 would sweep the planet; but, given the extent of the global challenges created by the pandemic, and given the financial response to COVID-19 by governments around the world, it wasn’t difficult to predict some of the financial fallout. Perhaps not enough to know exactly where the economy is headed, but at least enough to give smart investors an edge—and even a head start.

For example, between supply chain disruptions and the printing of trillions of dollars, it wasn’t a stretch to assume that there would be some inflation. And with eighteen months of lockdowns, it isn’t much of a surprise that attitudes about remote work have changed. Many investors have been able to leverage their predictions of these two outcomes to generate a lot of money over the past year.

Again, it’s not about reading the tea leaves and knowing exactly what’s going to happen. It’s about exploiting small pieces of information to get an investing edge. It’s about seeing the trends before others do to get a head start. It’s about being flexible in your investing efforts so that you can pivot and change strategy when you see an opportunity (or a potential pitfall).

As you read this book, keep in mind that economics is not like physics—there are no universal laws that define how markets, people, or even governments must act and react. While we talk about the history of the economy in this country, remember that history is a great predictor of the future, but it’s not a crystal ball. During this economic crisis, this economic cycle, and all future economic cycles, it’s possible that we will see action and reaction that has never been seen before.

As an investor, you must also be a student of economics. And as a student of economics, you must be constantly willing to take in new information, add it to the economic models in your head, and then use those models to spit out the best information possible. While others are simply being dragged along by economic news and events, those who understand the basic concepts behind how things work will be best positioned to lead the pack, make good decisions, and survive (and thrive) financially.

Like I said, I don’t know if what we’re seeing today is the beginning of the next recession or, if so, how bad that recession will be. (As you’ll learn from reading this book, not all recessions are like the 2008 crash.) However, even if this is not the beginning of the next recession, sooner or later, it will come. While we’ll have no control over it, we can control how we react to it and how we modify our businesses and investments to take advantage of a changing economic reality and the twists and turns that come with it.

While it’s the eventual downturn in the real estate market cycle that led me to write this book, my goal isn’t just to teach you how to make money in a down market. It’s to teach you how to make money at almost any point in the economic cycle.

In fact, as you’ll learn, when it comes to real estate investing, opportunities are almost always available. You just have to know where to look. It doesn’t matter if you’re reading this while we’re at the top of a hot market, during a market downturn, or at the start of the next market cycle.

Opportunities abound, and I will teach you how to find them.

Before I discuss the specific strategies and tactics you should be using at various points in the economic cycle, it’s important that you understand how the cycle works, what drives it, what impacts it, and how it affects us as real estate investors. The economy is ever-changing, and I can’t just give you a bulleted list of steps to master it: You need to understand why the economy does what it does. Once you have that foundation, not only will the strategies and tactics I discuss make more sense but you’ll also have the tools you need to deviate and modify those strategies and tactics, based on unique situations you’re sure to encounter in the future.

In this book, I’m going to provide that foundation. Then I will build on that foundation. I’ll teach you how you can profit from real estate during the various parts of the economic cycle, as well as how you can recognize shifts in the market and prepare your investing business for upcoming market conditions.

While much of your competition will change or even go away as the market changes, with the knowledge I’ll provide, you’ll be able to build a real estate business that will not only survive the shifts but also thrive.

Have any more questions that I don’t cover in this book? Or maybe you just want to keep the conversation going? Please hop onto the forums on BiggerPockets.com and connect with other like-minded real estate investors!

NOTE

I want to provide one very important warning before you continue reading:

Much of the information provided in this book is based purely on my opinion, my experience, and my investing style, as well as on historical trends and even some gross speculation.

In my experience, even successful investors will disagree on some of the advice and ideas I lay out. In many cases, differing opinions can both be correct; or both can be wrong. It all depends on the specific circumstances.

There will be exceptions to all the rules I discuss. Some might be small exceptions based on your personal situation and some might be large exceptions—for example, when the market doesn’t respond in ways that it has historically. And with the current uncertainty related to health, political, and economic events, that holds even more true today than any time in recent memory.

Please do NOT rely on any information in this book to make specific investing decisions. Instead, use the information contained herein to better understand the market, the economic cycle, and how best to leverage them to build a solid, low-risk portfolio.

As always, you understand your situation, goals, limitations, priorities, and investments better than anyone, so if anything in this book contradicts your beliefs, consider that what I recommend may not be right for you.

CHAPTER 1

INTRODUCTION

In May 2008, my family and I moved to Atlanta, Georgia. Driving through the city and surrounding counties, we couldn’t pass three houses without seeing a for sale sign in a yard or a foreclosure notice taped to a front door.

To say Atlanta had been devastated by the 2007 housing crash would be an understatement. It was one of the hardest hit markets in the United States, with housing values in some areas as low as 30 percent of what they’d been two years earlier. Foreclosure rates in Georgia were up 44 percent from 2007 and 117 percent from 2006.

And Georgia wasn’t alone.

Nationwide, foreclosure filings increased by more than 81 percent in 2008, with more than 800,000 families losing their homes. And that trend continued for the next two years. From 2009 through 2010, about 45 percent of existing home sales in the United States were REOs (real estate owned) or short sales.

As we drove through the neighborhoods near our house, we couldn’t understand why investors weren’t taking advantage of the reduced prices and buying up the distressed properties. I started attending some local real estate meetups to see what was going on. The only information I could get from the two or three investors who attended—down from hundreds just a year earlier—was that they were too scared to buy. They were worried prices would continue to drop, and they wouldn’t be able to resell their investments. In other words, these investors were passing up potential deals-of-a-lifetime because they didn’t have confidence in their exit strategy.

These investors were waiting for the perfect time to jump back into the market. They didn’t understand the real estate market works in cycles just like the broader economy—with upswings and downturns—and that there is never a perfect time. Instead, they should have been creating an investment strategy that worked across the full cycle.

This is what we do, and hopefully after reading this book, what you will do as well.

Don’t Fear Change, Embrace It

Change is inevitable. And you can respond to it in one of two ways:

You can embrace it, modify your investment strategy around it, and reap the benefits from the opportunities that present themselves.

Or you can fear it, refuse to adapt, miss out on the opportunities that come your way, watch your profits shrink, and potentially lose money.

Successful investors are flexible. They understand that to succeed they need to be prepared to take advantage of the opportunities that come their way—whether it’s during an upswing, a down market, or an inflection point (more on that later). It doesn’t matter if you’re just getting started or you’re a seasoned veteran, there are ways to make money during every phase of the real estate cycle. But to do so, you need to have a strategy to handle changing market conditions, which is what my wife and I have done over the last decade.

When Carol and I started our real estate investment business in 2008, the housing crisis was at its worst, and the foreclosure rate was the highest it had been in modern history. As flippers, that worked to our advantage. To find our next great investment opportunity, pretty much all we had to do was choose a random home from a list of foreclosures available for sale by the banks (also known as REOs). For the first couple of years we were in business, we only bought REOs because there were so many, and nearly all of them were good investments.

But in 2010, Carol started to notice a decline in the number of foreclosures on the market. She realized if we wanted to keep our inventory pipeline full, we’d need to start looking for different types of investments by the following year. She’d heard that some real estate agents were focused on short sales, where lenders were giving sellers permission to sell their properties for less than what they owed on their loans. These types of sales were becoming more and more popular, so we decided to start shifting our buying strategy to take advantage of the increasing supply of short sales on the market.

Within a year, REOs dried up in our area, but short sales were taking off. Because we’d started building our short-sale pipeline quickly after the real estate market began to shift, we were better positioned than most investors to take advantage of this new trend in acquiring investment property.

Fast-forward two years, and Carol again recognized a change in the market. She realized banks were getting more conservative in their approvals of short sales, and suggested we find a new strategy for acquiring deals because she didn’t believe short sales were going to be a viable option for much longer.

Around that time—2013 or so—I noticed builders were starting to sell off some of their excess lot inventory. These were empty lots in newly developed subdivisions that weren’t as optimal as the rest of the lots and didn’t have the same level of profit potential. But these lots were perfect for investors looking to build spec houses (being sold for a profit as-is or with minimal changes), which

Reviews for Recession-Proof Real Estate Investing

[Erika Finn · Rating: 5 out of 5 stars]

Excellent- read it cover to cover - easy to understand and insightful