How to Invest in Real Estate During a Recession

In this video, Ryan, the CEO of The Investor's Edge shares how he got into real estate when the interest rates where in the 8 percent range and how he was able to use historical performance to see how to buy low in a recession and then ride it out over the long term for profit. 

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How to invest during a recession.

Guys, I've been investing in real estate since nineteen ninety nine, so almost twenty four, twenty five years here, And I've seen some recessions. As a matter of fact, when I started buying real estate, interest rates were somewhere around eight or nine percent. And it was a recession then when I bought my first piece of real estate.

The very first piece of real estate I bought was a duplex, and the duplex I bought off the MLS, and I paid full retail price for it.

I thought that I was getting a good deal, but the reality is I really wasn't.

So what I had to do is I had to create it into a good deal and I did that by turning the basement into another rental unit. So there's a studio apartment. So then it was a three plex because this was the layout here.

This was this, and there was two beds. And then there are stairs that went down, my wonderful drawing. And then there was a little one bedroom. So there's a two bedroom here, a two bedroom here, two bed, one bath, two bed, one bath, one bed, one bath. It was underneath this, my beautiful drawing.

So I did that, which increased the rents. Now I did that because I moved into this property, and these two basically paid the majority of my living expenses was spent. I lived here for free, or close to free. And then what I could do is I could save that money that I was paying in rent, and I could save up that money so that I could then take that to put that as a down payment onto another property.

Now the great thing now is there's new loans called DSCR loans because they will take and do the loan based upon your rents, not based upon your personal income. Because to get this property, I had to qualify for it. I had to have the income to qualify for this property where with DSCRs, you do not have to have the income to qualify for it. So that's massive.

You're also limited by how many properties. The idea of getting into real estate now versus twenty five years ago is so much easier to get into real estate now. There's so much more available, to have success in it. So that was my first deal.

I don't know what I paid for it. I'd have to dig a lot to find that, and I still maybe wouldn't. But, we ended up selling that property a few years later. I would say four or five years later. The reason I sold it, and I'm not a fan of selling real estate, but I changed my model and I went away from plexus and I went just to single family houses.

And the reason why I went to single family houses is because my average tenant right now stays for five years.

My average tenant here stayed for six months.

So these are what I call transient tenants. The most expensive thing you have with your rental properties is you're rent ready.

I've gotta clean the carpets, maybe have to do a re coat of paint, whatever the case is. The rent ready is very expensive. The loss of rents is also very expensive. And so I came up with a new strategy because these, when I ended up with a four bedroom, two bath house, there was less transient. People that went there wanted to stay there longer, where these things were more changing all the time.

Now there's different models for different things. I really like this model because I wanted to have low management, and this model works really well for that. So depending upon what you're what you're looking to do. So that was my first deal.

I paid full retail value for it. I didn't get a great deal.

And so that was my very first my very first rental property. Interest rates were around eight, eight and a half percent, somewhere in there.

And so it was a good time to buy during that kind of a recession. And the reason is is because prices were lower.

Typically, what you have when you're dealing with a recession is you typically have lower prices and higher interest rates. Now there's a few different types of recessions. Right? It could be real estate.

It could be tech sector. It could be a bunch of different sectors. It could be the stock market. So it depends on what type of recession we're talking about here.

But, typically, if it's a real estate type recession, you'll have lower prices when interest rates are high. So we're starting to see interest rates starting to come down, which typically will make prices rise, because your cost people are buying houses based upon their payment. Can I afford the payment? And based upon that, could have an increase on prices or typically does.

Two thousand eight, two thousand nine. Okay.

What happened? It was the real estate bubble, the biggest real estate correction of all time. And so there was a house that I looked at, during this time. The house had sold five years earlier. So let's just say it was a brand new construction house that had sold. It sold, I don't know, let's just say two thousand two, and it sold for nine hundred and fifty eight thousand dollars, really close to a million dollars. Okay?

This a few years later, five, six years later, this house was listed on the multiple listing service, and it was listed for somewhere around, I don't know, four hundred thousand.

So it was less than half the price. We went and got this property in our contract for somewhere around three hundred and fifty thousand dollars.

And, again, this is in two thousand nine ish.

And I remember fretting and stewing about if we're paying too much for this property at three hundred fifty thousand dollars. And the reality is I think in the current market situation, I probably I probably was paying a little too much for it.

But I went and did it anyway. Really, my wife talked me into doing it or I wouldn't have.

Fast forward, and in twenty twenty two, twenty somewhere twenty twenty one, twenty two, somewhere in there, I sold that property for about one point two million dollars.

Now we had put some money into it and some of those things, but, still, it's a significant gain.

And I think that's when you're talking about real estate, there's different types of plays. You've got your transactional where you buy it and you sell it. Maybe you fix it up, which would be a flip. Maybe you get it under contract and sell your contract, which would be a wholesale, or you're buying it and holding on to it. No matter what type of real estate you're doing, if you want long term wealth, you've gotta invest long term in real estate. That's really what it comes down to is investing in long term real estate. So let me show you because this is the best way I can feel comfortable with what's going to happen in the future is to look at the past.

I look in the past and say, okay. What happened? So if we look here in two thousand and seven, that was the peak. This is median house prices.

At two thousand seven, that was the peak at two hundred and fifty seven thousand dollars. K? Let's actually write that down. So two fifty seven.

Okay? The worst of it this was in q one twenty two thousand seven. Okay?

Or let's make sure I got it right. Yeah. Two thousand seven. Okay? Then the worst of it it's kinda funny because it came down. It popped up a little bit. But the very worst of it was in two thousand and nine.

Two years later, it was at two hundred and eight thousand dollars. Now this is really important because I want you to remember these numbers.

Then to get back to the two fifty seven, we got back to the two fifty seven.

So we got back to, say, two fifty eight in q one of twenty thirteen. Okay? So now let's jump back over to the whiteboard here and really diagnose this. Okay?

So the high of the market, two hundred fifty seven thousand in two thousand and seven.

This is the high.

The low of the market, the lowest it went was in two thousand and nine. That's two years later, and it went to two hundred and eight thousand dollars. Okay? So the difference between that's what's forty nine thousand dollars, forty nine thousand dollars divided by divided by two zero eight.

Twenty three well, actually, it's two fifty seven subtract two zero eight divided by two fifty seven is a nineteen percent.

Values went down nineteen percent.

K? So if you look at the very worst market correction, real estate market correction of all time, okay, it was a nineteen percent difference in what happened in the values.

However, a few years later in twenty thirteen let's see. What are we gonna call that four years later? So from the lowest to back up to where it was was four years. Okay?

And that's when we got up to two hundred and fifty eight thousand dollars. So there's a couple of things to learn from this. One, the lowest to back to where it was was a four year period. So do you have the staying power where you could hold this property for four years?

That's important. Okay? And we'll talk about more more of that in a minute. The other thing to keep in mind is the value of the property dropped nineteen percent. We'll just call it twenty percent.

So if you play your cards right, your worst case scenario based upon historical performance is a twenty percent decline in values, and your worst case scenario is you're holding that property for four years.

That's our worst case scenario. However, what are we doing what are we gonna do during that? We're gonna rent the property. So if we go look at rents during the same time period, okay, in two thousand and seven, rents were approximately, let's just call it seven hundred and twenty dollars for rents.

So rents were about seven twenty. Okay. Two years later in two thousand and nine.

Oh, what happened to rents? They went up.

Rents went up.

Not lowered. Rents went higher.

Why is that? People were getting foreclosed. Everybody was moving down. Rents went up. K. And then let's look at in twenty thirteen.

K. Rents let's just call it, like, nine twenty three.

Rents were up again. So when it comes to investing during recession, it really comes to playing the long game here. If you know what your worst case scenarios are and you buy something and you plan on keeping it forever, you're going to see a few amazing things happen. One, you will see rents increase.

It doesn't matter. Rents will go up over time. It's historically. You can see in nineteen forty, the median rent was twenty seven dollars. In twenty twenty one, the rent was eleven thousand one thousand one hundred ninety one dollars, and it's gone up from there. Okay? Rents go up.

Second thing you're gonna see is values go up. Okay? So we come back to our other chart here, which you can find all this on our website. Values go up. Like, the same house, the median house, twenty thousand and we're at four twelve or, you know, thereabouts, which is we've gone as high as four thirty eight.

So you're seeing values that'll continue to go up.

When you're dealing with a recession and you can buy properties in this area, which is where I bought that house that I was telling you about, maybe I bought it a little bit on the high side and I'd seen some things lower, and I was like, oh, no. What if things go in half? And I can tell you, it was just as hard for me to decide to buy that property during that recession as it's going to be for you saying, should I buy this house? Oh, no.

What's gonna happen? And that's where we've gotta look back on historical performance and come up with what we think is gonna happen in the future. The other thing that happens with this is your tenant is going to pay down your loan. K?

Kennet is gonna pay down your loan. So if you come over here and we look at this stuff nope. Wrong one.

The tenant is going to pay down your loan. Okay? So if you're buying a property for three hundred fifty thousand, let's say I mean, it could be more, could be less.

Let's say taxes. That's about right. We're gonna put interest rate at six and a half because it's an investment property.

Not gonna put any mortgage insurance. So your payment on that is twenty three ninety three. Okay? So now what I wanna show you is an amortization schedule.

Okay. So three hundred fifty thousand, Third year, we're gonna go six point five percent on the rate.

Loan starting date fine. And here's the schedule. Okay?

In their first payment, that first year, about three hundred, three hundred and twenty dollars is going towards principal and nineteen hundred dollars is going towards interest. But you can see something.

Every single payment, the amount that goes towards interest goes down and the amount that goes towards principal goes up. As a matter of fact, in your final year of payment, the majority of your payments go all the way down here to thirty years.

You can see here the majority of your payment, twenty three dollars goes towards interest and two thousand one hundred and eighty eight goes towards principal. Most people don't realize this, that this how this is how it works. So this is your pay down. So you can see in this year, you're gonna pay down, what, twenty five, twenty yeah. Twenty five thousand dollars, where in this first year, you'd pay three hundred dollars a month. So you got thirty six hundred dollars that is gone towards interest. So what's important here is let's just say we're four years later.

Okay? So twenty twenty five, twenty twenty six, twenty twenty seven, twenty twenty eight, so twenty twenty nine. K. So to this point, let's say we're sitting right here. What I owe is three hundred and thirty two thousand dollars and I owed three hundred and fifty. So my tenants over that four year period have paid down twenty thousand dollars of my loan.

But the other great thing here that people just don't realize is if interest rates go down, I can still refinance.

So if I buy something when interest rates are a little higher and they go down, I can refinance. I'm typically buying a better deal when interest rates are higher, and then I can refinance when interest rates go back down. So I can still maintain this asset, have this asset, and then refinance when rates go down. So if I buy this at six and a half percent and rates get down to three percent, I can refinance that. Now, yes, I'm going back onto an amortization schedule, and maybe I wanna do a ten year or a twenty year or maybe I wanna do a thirty year and just pay extra. But those are some things that I can do also. So as we're talking about investing in a recession, the most important thing is we invest for the long term, not for the short term.

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