Book: Recession-Proof Real Estate Investing

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

• “The business cycle is driven by interaction between two main forces: inflation and interest rates.”
• “When inflation starts to take hold, the Fed will step in and raise interest rates. Higher interest rates will have two major effects: It will encourage consumers to spend less and save more—remember, higher interest rates mean higher returns from savings accounts, certificates of deposit, and bonds. It will decrease consumers’ abilities to borrow money—remember, higher interest rates mean higher borrowing costs.”
• “Note that while the lengths of a business cycle may vary, each has one very important factor in common: The expansions are almost always longer than the contractions.”
• “The average length of the business cycle is between five and eight years; and The expansion part of the cycle is much smoother and longer—sometimes four or five times as long—as the contraction phase.”
• “Expansion Phase In this phase of the cycle, buyer demand for housing increases as other economic factors such as wage and job growth are strong. Occupancy rates continue to increase as vacancies continue to decrease. Housing inventory is dropping, and new construction begins to meet the increasing demand. Because demand is outpacing supply, prices increase—oftentimes faster than the rate of inflation.”
• “At the peak of the cycle, prices hit a plateau and demand starts to soften.”
• “New construction continues to boom, as the units coming on the market during this phase have been in the works for months or years at this point. But the strong economy has been driving inflation, and around this time, the government steps in and raises interest rates to help combat that inflation.”
  Recession phase “For investors, this means an increase in the number of foreclosures, higher vacancies, fewer buyers, and reduced property values. As occupancy rates fall below the long-term average, we often see reduced market rents. New construction quickly stops, and many partially finished projects go unfinished. It’s not uncommon to see landlords drastically lower rents to attract new tenants and homeowners drop prices to attract buyers during this phase.”
• “Recovery Phase This is the phase of the real estate cycle when the previous decline starts to turn around. At the beginning of a recovery, real estate prices may continue to decrease, or they might plateau. During this phase, it’s common for the government to lower interest rates in an attempt to spur economic growth. Once the recovery gains momentum, inventory declines, and many distressed properties get scooped up by investors or savvy homebuyers. Buyer demand increases and prices may start to rise, but still tend to stay below the inflation rate. New construction hasn’t yet picked up, as financing is still tight and builders are likely still skittish. But builders start to come out of their slumber, begin to line up credit and financing, and look to build their portfolio of land for future development.”
• “To understand where we really are in the cycle, we have to dig deeper than just looking at where our local real estate market is today. Those who know how to track the economy can piece together clues to make an educated guess about where we really are in the current cycle.”
• “Observation While this is the least scientific of the ways you can assess where we are in the cycle, just looking at what’s going on around you in terms of the economy and the real estate market can give you a reasonable indication of where things may be and where they may be headed.”
• “Timing Because business cycles tend to adhere to a rough schedule, we can use that information to determine where we might be in the current cycle.”
• “Unfortunately, this is also the problem with relying on timing. While it can be a good way to help you understand basic patterns, there’s a big margin of error when it comes to actual prediction value. In other words, understanding the historical timing behind the business cycle can give us a general range for when we should expect things to change, but the actual timing for any one cycle can be off by several years.”
• “Data While we’ve discussed using observation techniques and looking at the timing of past economic cycles to determine where we may be in the current cycle, the most reliable indicators of where we are and where we’re headed are the data itself.”
• “Yield Curve The yield curve is an important economic concept that every investor should be familiar with. Simply stated, the yield curve represents the change in interest rates for government bonds of different expiration dates.”
• “It turns out that the yield curve is one of the best predictors of an impending top inflection point in the economic curve. Right before a recession, we will typically see the yield curve go from flat to inverted, with the left and right ends of the curve higher than the middle.”
• “An inverted yield curve has been one of the most reliable predictors of a recession for the past century, and typically occurs between six and 18 months before the downturn is evident.”
• “In a healthy economy, we expect the U3 unemployment rate to be in the range of 4 to 5 percent. When unemployment creeps above this mark, it’s typically a signal that the economy is weakening.”
• “When the unemployment rate gets down near 4 percent—and below—we generally consider the nation to be at full employment. Full employment is good short term because it means many Americans are gainfully employed. However, it’s also a precursor to inflation, which will be a drag on the economy. Full employment has historically been a signal that a downturn, or full-fledged recession, is right around the corner.”
• “The Buffett Indicator suggests that the total value of the stock market is directly related to the nation’s GDP.”
• “Notice that the Buffett Indicator has only been above 100 percent four times in the past 50 years, and all four times were followed by a recession within a couple years.”
• “Many experts agree the ideal growth rate for the GDP is 3 to 4 percent.”
• “And in general, if GDP is negative for two or more quarters in a row, the economy is considered to be in a recession.”
• “Economists often look at wage growth as an indicator of whether employees and consumers will be either spending money—and driving the economy—or scrimping and saving because their paychecks are growing at a slower rate than inflation. When wage growth is lower than inflation, it’s a sign that the overall economy is out of whack and economic challenges are looming.”
• “You’ll notice that wages tend to drop about two to three years before a recession is declared.”
• “Housing supply is sometimes referred to as housing inventory or days on market (DOM), and is the average amount of time it takes to sell a house in a particular market. The more demand there is for housing, the less time a typical house stays on the market for sale before being put under contract. On average, housing supply across the country is around six months. When supply drops below six months, there’s more than average housing demand (the market is strong). When supply increases above six months, there’s less than average housing demand (the market is weak).”
• “We’ll talk about this a lot more in the next chapter, but notice that when housing supply starts to rise, a recession nearly always follows.”
• “The number of housing starts in an area—or the number of permits that have recently been issued—can provide valuable data about what phase of the real estate cycle your local market is in.”
• “Notice that there tends to be a dramatic drop in housing starts immediately preceding each of the past eight recessions. Also notice that there have been some large decreases that didn’t result in a recession (most notably in the mid-1960s), so this isn’t a perfect indicator.”
• “There are two main factors that impact the housing supply currently available: The average amount of time it takes to sell a house. In our example above, if the town were only selling ten houses per month, it would take ten months to sell the same 100 houses listed for sale. The number of houses listed for sale. In the same example, if the town were selling 20 houses per month, but had 200 houses listed for sale, it would also take ten months to sell the inventory.”
• “In other words, about six months is what’s considered equilibrium in many real estate markets across the country. When there’s less than a six-month supply on the market, it usually means sellers are in control because demand exceeds supply. More people want to buy houses than want to sell them, so buyers are competing for the same properties, which drives up prices. This is known as a seller’s market. On the other hand, when there’s more than a six-month supply of houses on the market, it usually means buyers are in control. There are more houses for sale than people to buy them. The lack of interested buyers means sellers need to compete against one another to sell their properties. Often, sellers will lower their prices to attract buyers. This is known as a buyer’s market.”
• “When vacancy is high, properties typically generate less income, which reduces their value and decreases demand.”
• “And when interest rates are higher, borrowers are unable to accept low returns on their investments. If an investor is paying 8 percent in interest on their loan, it’s unlikely they’ll be willing to accept an investment that’s only generating a 4-percent return.”
• “If you’re interested in buying investments that generate cash flow, buying during times of higher cap rates will position you to make more profit, both from increased cash flow and from an increase in property values when cap rates drop.”
• “On the other hand, if you’re ready to sell your income-generating property, you’ll want to do so when cap rates are low because that’s when sale prices are the highest.”
• “I’m not a big fan of investing for appreciation over long periods of time because historically, in many areas of the country, real estate values don’t tend to increase much more than the rate of inflation. Unless you’re investing in an area where appreciation tends to outpace inflation, you may find that your profits don’t live up to your expectations or long-term goals.”
• “This also provides an opportunity for those investors who do “live-in flips”—investment deals where the buyer lives in the property for at least two years to minimize their tax burden on any profits generated.”
• “Because some investment strategies rely on you being good at buying, while some rely on you being good at selling. If you’re good at both, you can be successful at any point in the cycle.”
• “You’ll typically see that it’s easy to find and buy good deals during the recession and recovery phases because there’s less competition from other investors, and sellers are desperate to get rid of property over concerns that values could continue to drop. But that makes it hard to sell during these times. So it’s generally a good idea to focus on buy-and-hold strategies during these phases.”
• “A conventional lender is typically a big bank or mortgage broker that facilitates loans insured by government agencies or quasi government agencies like Fannie Mae, Freddie Mac, FHA, or VA—all the big organizations you’ve probably heard about that make loans to consumers.”
• “Portfolio lenders tend to be small banks that loan their own funds—the money of their depositors—instead of loaning government secured funds. This means that the banks have the ability to define their own lending criteria and aren’t hamstrung by the requirements of large government organizations. For this reason, small banks are often a great way for real estate investors to fund both non-traditional investments, like flips, as well as more traditional investments like buy-and-hold real estate.”
• “As we get toward the top of cycle and over the hump, things change quickly. Unlike conventional lenders who start to require larger down payments and better credit, portfolio lenders just stop lending altogether.”
• “The tightened lending from portfolio lenders will continue throughout the recession and even throughout the recovery. Late in the recovery, small banks will get their appetite for rental financing back, but many of them won’t start lending to house flippers again until the next Expansion Phase.”
• “Hard-money lenders typically have much higher interest rates and less favorable terms than conventional or portfolio lenders, as they care less about the ability for the borrower to repay the loan. These lenders are making their loans in large part based on the value of the real estate asset securing the loan; if the borrower defaults, the lender expects that the property should have a high enough value that it can be sold and the lender can be made whole.”
• “During the expansion, when interest rates are low and there’s a lot of competition from all other sources of financing, professional lenders will drop rates and improve their terms to compete with these other sources. But as soon as the market turns and their competition goes away, it’s not uncommon to see hard-money rates jump into the mid-teens, including high fees on the front end of the loan. Keep in mind that lenders aren’t just trying to take advantage of investors during this time; they have significantly higher risk of getting burned by investors who lose money and don’t repay.”
• “Long story short, hard-money loans are a great backup plan for house flippers and landlords who need money, but throughout most of the cycle, they are an expensive alternative to other forms of lending.”
• “Private lenders are people we know—friends, family, and professional acquaintances. These are generally people who have extra funds in a savings or retirement account and are looking for a better return than what they’re currently getting. They lend based on the relationship they have with the investor or borrower, not so much based on the borrower’s financing resume or the specific deal. In fact, many private lenders aren’t real estate savvy.”
• “Passive investors are those who invest in syndicated and group-funded deals.”
• “Tactics are the implementations of our strategies. For example, if our strategy was buy and hold, the specific tactics we’d employ might include buying duplexes in blue-collar neighborhoods, financed through portfolio lenders, and held for three to five years. This would be a specific implementation of the higher-level strategy of buy and hold.”
• “If you’re a flipper and you find yourself in this situation after the market peak, it’s better to cut your losses and accept a small loss than to wait for the market to recover and risk more sizeable losses as the months and possibly years drag on.”
  “Wholesalers most often sell to flippers. So, wholesaling will be most viable during phases of the cycle when flipping is viable. The best opportunities for wholesaling exist when deals are exceptionally difficult to find. Otherwise, flippers and landlords will find their own deals without the need for a wholesaler. If you want to implement wholesaling as a strategy, you have to be good at marketing and acquiring property at great prices. Wholesalers need to pay even less for properties than flippers because both the wholesaler and the flipper must be able to mark up the price of the property when reselling to make a profit. This can be nearly impossible in both an extremely hot market and a declining market. Great negotiation skills are a major asset for wholesalers.”
• “Like flippers and wholesalers, buy-and-hold investors want to buy low to maximize their earnings, but unlike those other investors, they don’t need to sell high. Instead, they want to buy at a price where they can make a profit on the rental income each month, presumably for a long time into the future. So, good buy-and-hold investors are only interested in low purchase prices. For that reason, a buy-and-hold strategy is often best during the recession and recovery phases.”
• “When we talk about multifamily investing, we’re typically referring to the purchase of properties with over five units.”
• “While I talk about multifamily investing as one strategy here, multifamily investing can actually be broken up into two common strategies: Buying for cash flow. Cash flow in the multifamily space is essentially the same as buying single-family rentals. The investor is purchasing the property for income well into the future. But these investors prefer to the scale of buying many units at one time and in one place, rather than purchasing single-family houses. Buying as value-add. This is the apartment equivalent to flipping single-family houses. When we purchase a single-family home to flip, we are typically buying something that is in bad physical condition, renovating it, and then reselling at a profit based on the physical renovations we’ve done. In the apartment world, instead of just doing physical renovations, we are improving the financial performance of the property as well. We do this by fixing management, increasing income, and lowering expenses. We can then resell the property at a lower cap rate, which translates to a higher price.”
• “Demand for new construction homes is mostly limited to the Expansion Phase and the beginning of the Peak Phase; When the market hits the top inflection point, buyers flee from new construction first, often leaving developers and builders with partially completed inventory;”
• “The time required to implement development and new construction strategies is long—typically at least six months and often many years. Investors who engage in development and new construction must plan ahead and start building during the recovery or expansion phases, so they have inventory to sell during the late expansion and early peak phases when demand is at its highest.”
• “During the recessionary and recovery phases, when there aren’t many professional lenders working and private lenders are scared to deploy their cash, lenders may be able to generate 10 percent or more above bank rates, plus several
• “points” upfront, on their loans. But during the expansion and peak phases, when lenders are fighting each other to loan money to investors, lenders often have to make loans that rival bank rates, with few fees or points.”
• “A note is simply a promise to repay a loan (the mortgage agreement you sign is a note), and there are many different strategies around buying, selling, and holding notes. A few of the most common include: Selling property using seller financing and collecting cash flow from the note that’s created from the loan; Buying “non-performing” notes (notes where the borrower isn’t paying as promised) for deep discounts and then working to generate profit from the note by negotiating repayment with the borrower or foreclosing on the property; Creating or buying a note, and then selling off parts of a note for quick profit or to borrow against the note.”
• “For example, self-storage facilities often see a sharp rise in demand during a recession, simply because more families are moving in together or moving into smaller spaces and need a place to store their extra stuff.”
• “In general, though, I recommend focusing on the purchase of traditional commercial investments during the recovery and expansion phases. Especially early in the Expansion Phase.”
• “If you’re buying land to develop it or bank it, the best time to buy is when property values are depressed.”
• “On the other hand, the best time to sell land—if land banking —is during the recovery and expansion phases.”
• “Here are some quantitative data you can look for to determine when you may be entering the Peak Phase:”
• “Interest rates are starting to rise.”
• “Unemployment rate has leveled off at full employment.”
• “Cap rates level off and start to rise. With such high demand during the end of the Expansion Phase, sellers increase their prices, driving down cap rates on income producing properties.”
• “Around the time cap rates level off at a low point, the Fed is going to start hiking interest rates, which will cause cap rates to tick up.”
• “With sellers continuing to list and buyers unwilling to buy as readily, inventory and DOM increases in many markets. This DOM reversal is a strong indicator that the market is approaching or has reached the top.”
• “As the market rushes to the top, investors start to see appraisals both for refinances and resales come in lower than they previously did.”
• “Profit margins are shrinking for flippers/wholesalers.”
• “Flip with caution. Flipping is still a great strategy, even in this phase. But as you approach the top inflection point, your risk increases significantly. If you’re unable to sell your properties before the market starts to decline, you may lose money on your deals.”
• “Be certain of your numbers.”
• “Keep projects quick.”
• “Don’t take on more projects than you can work on simultaneously.”
• “Have multiple exit strategies for each project.”
• “For example, focusing on flips that you’re confident would make decent rentals or lease-option properties if you’re unable to resell them for a profit can help protect you from sustaining significant losses. You might also consider selling your current home and moving into the rehabbed property until the market improves.”
• “Avoid thin deals.”
• “Avoid large amounts of leverage.”
• “At this point in the cycle, it’s particularly important to keep your costs as low as possible.”
• “Focus on properties that appeal to as many potential buyers as possible.”
• “When you’re in a situation where the market may turn, avoid very low-end rehabs where potential buyers tend to have a more difficult time qualifying for financing. And stay away from exotic or “taste-specific” rehabs that will appeal only to a small segment of the buyer pool.”
• “Stay away from high-priced houses. Higher priced houses will be the first to stop selling when the market turns.”
• “Avoid speculation unless you’re willing to hold long term.”
• “Flip in good school districts.”
• “Here are tips for how to stay out of trouble when buying for cash flow during this phase and how to maximize your returns:”
• “Assume 10 percent lower market rents.”
• “Assume 10 percent higher vacancy.”
• “Focus on C-class instead of A- or B-class properties.”
• “Consider student housing. When the market turns down, full-time college enrollment tends to increase. Higher college enrollment means more demand for student housing.”
• “Multifamily value-add works, but deals are hard to find and there is added risk.”
• “I recommend that those who are interested in getting into flipping during this phase consider starting with wholesaling instead. I also recommend that any flippers who want to recession proof their flipping business consider wholesaling at least some of their deals instead of flipping them.”
• “Consider recession-resistant commercial assets.”
• “Specifically, self-storage facilities and mobile home parks are two asset types that tend to not only maintain their income, but see growth, during periods of economic turmoil.”
• “Avoid short-term borrowing.”
• “Consider using long-term lease options to rent or sell.”
• “Don’t buy land unless you’re willing to hold onto it long term.”
• “Start moving assets to cash.”
• “Sell anything you’re not willing to hold for three to five years.”
• “Apply for lines of credit.”
• “Restructure short-term debt.”
• “Refinance before rates increase.”
• “Sell off income properties that can’t handle a 10 percent decrease in rent or a 10 percent increase in vacancy.”
• “Get rid of properties in bad neighborhoods if they’re not generating decent cash flow.”
• “Sell anything that can fetch a big premium from speculators.”
  “In fact, one of the biggest mistakes I see investors make during a downturn is not cutting losses soon enough, and finding themselves in a much worse situation later, wishing they’d gotten out sooner.”
• “If you have properties or other assets you purchased with an option contract, now’s a good time to execute that option if it’s in the money, especially if you plan to resell that asset for a profit.”
• “Find out now if there are rental limits in any of the buildings where you own properties. If there are and you’re concerned about not being able to rent those units, sell them now.”
• “If you have commercial buildings—retail or office space—and you don’t plan to hold long term, now is a good time to think about selling.”
• “If you own properties you plan to sell to a buyer who will finance their purchase with an FHA loan, don’t wait. FHA will likely tighten up its financing rules for some types of properties—especially condos and townhouses—when the market starts to decline.”
• “If you own performing notes where you believe the borrower is likely to run into financial trouble or fall behind on their payments, consider selling off those notes now, even if you have to discount the note. It’s better to reduce your profit or take a small loss on a note now than have to foreclose on a property that’s underwater and difficult to sell later.”
• “Here are some observational clues you can look for to determine when you may be entering the Recession Phase:”
• “Desperation selling is increasing. Many homeowners and investors are afraid things will get even worse, so they sell their properties at a big discount to get rid of them before the market declines even further.”
• “Banks tighten their lending requirements. When the economy weakens, banks become more concerned about a borrower’s ability to repay a loan. As a result, they become more stringent in their lending requirement.”
• “Few investors remain. Most of the investors who flooded the market during the expansion and peak phases exit the market during the recession.”
• “We have two successive quarters of negative GDP.”
• “Housing supply is increasing above the average.”
• “There’s an increase in 30-, 60-, and 90-day late payers.”
• “There’s an increase in foreclosures.”
• “Home prices are falling.”
• “Appraisals are coming in low.”
• “There’s an oversupply of new construction.”
• “Rental rates decline and vacancies increase.”
• “Here are some ways you can maximize profits by investing during this phase of the cycle.”
• “Buy and hold in good school districts.”
• “Start a turnkey rental business.”
• “The later we get in the Recession Phase, the more REO deals we’ll see hit the market. This is a good opportunity to build a buy-and-hold portfolio, and potentially start buying flip deals when you’re confident the market will support a resale.”
• “At this point in the cycle, there are many notes where the borrower has either fallen behind on payments or stopped paying altogether. You may be able to purchase these notes for pennies on the dollar, providing you equity in the note and/or allowing you the opportunity to negotiate better terms with the borrower.”
• “Wholesale to landlords.”
• “Depending on the severity of the recession, banks may be willing to let homeowners sell for far below the amounts they owe on their mortgages. Because short sales are generally move-in ready, this is an opportunity to start picking up turnkey rentals, either for yourself or to wholesale to buy-and-hold investors.”
• “If you have the cash and are willing to hold for a few years, now is a good time to buy raw land in areas where new construction has recently stopped.”
• “Take advantage of seller financing.”
• “Purchasing with lease options is a great way to give yourself the flexibility to control a property while still giving you a future “out” if the recession has a bigger impact on the deal than you anticipated. The benefit to sellers is that they get an upfront option fee, plus they receive a guaranteed monthly income stream until you decide to purchase the property outright or give it back.”
• “Subject to involves taking over the payments for a homeowner. The buyer agrees to continue paying the loan as scheduled, and in return, gets the deed from the seller. A wrap is similar to a Subject to, except in this case, the buyer and seller execute a new mortgage agreement that “wraps” the original. This allows the seller to collect additional monthly payments in addition to the loan payments the buyer agreed to take over.”
• “Focus on the lower—but not lowest—end of the market.”
• “When the foreclosures start piling up, many banks will package them together and sell them in bulk—at big discounts—to investors who have enough cash to handle the purchase.”
• “Now is a good time to focus on deals that may not have an immediate payoff but can yield a good profit down the road.”
• “When the market begins to recover, there will be more opportunity to land great deals than in any other phase of the cycle.”
• “Get your real estate license. A lot of foreclosures and short sales will come available on the MLS as the recession turns into a recovery. Competition for these properties will grow fierce as the recovery progresses, and having direct access to the MLS will give you an advantage over your investor competition.”
• “Build relationships with small banks. Small banks are probably not lending on investment deals at this point in the cycle, but they will start lending again in the next phase. And they prefer to lend to those they have an existing relationship with. Figure out which small banks were providing investor loans in the previous parts of the cycle, and start building relationships with them.”
• “Get familiar with the public auction process in your county.”
• “Build relationships with lenders, investors, and people with cash. If you don’t have access to lots of cash, there’s another option. You can build relationships with other investors who can partner with you on deals and people with cash who are willing to lend or partner. Having money partners will cost you some of your profits, but it will position you to close deals during a time when bank lending is tight.”
• “Start building relationships with contractors, especially if you’re a flipper.”
• “Here are some observational clues you can look for to determine when you may be entering the Recovery Phase:”
• “Experienced investors are coming off the sidelines.”
• “A bit of confidence is returning the market.”
• “GDP is increasing, and the end of the recession is declared.”
• “Foreclosures are leveling off.”
• “Housing inventory has peaked and is starting to drop.”
• “While general economic data may still be a mixed bag, many of the most prominent metrics—unemployment, GDP, wages—will have either leveled off or shown signs of improvement.”
• “Focus on REOs. Not only are there plenty of REO deals on the MLS, but small banks are looking to liquidate their foreclosures as well. Stopping into a local small bank and asking to speak with the head of commercial lending can generate some great REO leads.”
• “Focus on short-sale purchases. Many homeowners are underwater on their mortgages, especially at the beginning of this phase. To minimize their losses, banks allow some of these homeowners to sell their homes for less than what they owe on their mortgage. This can be a good time to buy homes at a low point in their value and either rent them or resell them for a profit when the market improves.”
• “Buy on the courthouse steps. Before bank foreclosures become publicly listed REOs, they typically go to auction at the local courthouse.”
• “Later in the cycle, during the expansion and peak phases, you’ll find that that you need to do bigger and more elaborate renovations to differentiate yourself from the competition. But in this phase, easy projects—sometimes called paint-and-carpet rehabs—return nearly the same amount of profit with less risk, lower capital requirements, and not as much work.”
• “Focus on good school districts.”
• “There’s a good chance that multifamily or commercial properties are on sale at this point in the cycle, especially early in the recovery.”
• “Start a turnkey rental business. We mentioned this in the previous Recession Phase chapter, but turnkey rentals are a great business model during the Recovery Phase as well.”
• “Buy performing notes at a discount.”
• “Take advantage of discounted non-performing notes. If you’re a note buyer, non-performing notes are cheap during this phase. Because borrowers are starting to get back on their feet, negotiating a modification is easier than it was in the previous phase.”
• “Purchase using lease options. Now is a great time to try to buy property using a lease option. You can take control of these properties for a small amount of money, and then wait for the market to improve and lending to loosen up before you have to complete the purchase.”
• “Consider buying for appreciation. While I almost never recommend a real estate investor purchase a property with the intent of profiting on its appreciation, this is the one point in the cycle where there is a good chance properties purchased today will be worth more in a couple years, even if you don’t do much to them.”
• “If you’re holding land that you plan sell to developers, start marketing it in the Recovery Phase.”
• “Get good at analyzing deals. The Expansion Phase of the cycle is more competitive when it comes to finding deals. In some parts of the country, this extra competition means smaller profit margins than during the Recovery Phase. Good investors respond by doing larger deals and deals with thinner profits, but it’s important to be able to mitigate the added risks of these deals by perfecting your analysis techniques.”
• “Dig into the rehab process and learn how larger renovations work. For the flippers out there, the next phase will bring opportunity to make money on larger renovation projects, adding square footage to properties and even doing teardowns and rebuilds.”
• “Here are some observational clues you can look for to determine when you may be entering the Expansion Phase:”
• “There is general economic optimism.”
• “There’s more talk about real estate investing and investing in general.”
• “It’s no longer easy to find great deals.”
• “More investors start to build acquisition strategies around finding “‘off-market’ deals. Direct-mail campaigns get popular, bandits signs are everywhere (billboards advertising ‘We Buy Houses!’ are popping up again), and more investors rely on door knocking and cold-calling to find deals.”
• “Selling to homeowners is easier.”
• “Professional money is easier to find.”
• “Private money is easier to find.”
• “You’re competing with cash offers.”
• “You’re competing with commercial buyers.”
• “For any investors going through their first cycle, you might assume that real estate gurus pitching seminars, courses, and high-priced training are common in the industry at all times.”
• “Housing supply is dropping.”
• “Appraisals are coming in higher.”
• “Money is getting cheaper.”
• “Making money during the Expansion Phase is pretty straightforward.”
• “Scale your flipping and wholesaling efforts.”
• “Consider a live-in flip.”
• “Get good at larger renovations.”
• “During the early part of the Expansion Phase, hedge funds and large private equity firms start buying in volume, especially in primary and secondary markets. While these firms often prove to be your competition when looking for deals, they are potentially your customers when selling.”
• “Raise money for syndications and private placements.”
• “The most plentiful buy-and-hold deals were in the previous phase, but there should still be plenty of good deals for landlords during the Expansion Phase, especially the early part. Because occupancy rates and market rents will likely increase throughout this phase, anything you buy earlier in the economic expansion should have a good bit of upside when it comes to future revenue.”
• “Demand for private lending picks up during the Expansion Phase, as many investors want to scale their businesses but don’t have access to as much financing as they’d like. If you’re lending to other investors, you can expect to get decent interest rates and earn solid returns on your investments.”
• “During the Expansion Phase, creating or buying performing notes is a great way to generate consistent cash flow with relatively low risk.”
• “If you’ve been holding on to large parcels of land that you plan to sell to a developer, the beginning of an expansion is the best time to market it.”
• “Refinance high-interest rate loans. If you have loans with high interest rates, this may be your last chance to refinance at lower rates. During the Peak Phase, the Fed will likely raise interest rates to combat inflation.”
• “If you’re a buy-and-hold or commercial investor, this could be your last chance to acquire good deals for a while. Instead of just focusing on acquiring more deals, take this opportunity to capitalize on profits your properties are generating. Maximize income by increasing rents on your existing properties if they’re below market value. And figure out where you can streamline your business to decrease expenses.”
• “If you have tenants who aren’t paying on time now or who are causing headaches, consider that they will likely cause bigger issues when the market turns. If you can legally get rid of those tenants now, you should take the opportunity.”
• “Now’s the time to prepare by improving your off-market acquisition strategies including yellow letters, knocking on doors, SEO, advertising, and partnering with wholesalers, because during the next phase you won’t be able to rely on public sales.”

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