13 Tips To Profit From A Dip
Novice investors lose their confidence during a recession. They become paralyzed by falling prices and perceived market risk. But as Warren Buffet famously said, “Risk comes from not knowing what you’re doing.”
Veteran investors know that value can be created both when markets are on the way up and on the way down. I believe the truest fundamental value can be added to your portfolio during the worst real estate markets. Anyone can achieve temporary equity in a property boom when all prices are rising, but long-term value is easier locked in during a real estate market dip.
These are my 13 tips on how to create long-term real estate equity in softening markets and how to maximize future profits.
1. Cash Is King
When markets are peaking, keep cash on hand to enable you to move on hot deals quickly. During a real estate downturn banks become risk shy, and your banker who was shouting at you to accept more financing a few months ago might suddenly take forever to decide about your new loan application.
Delays scupper deals. By keeping a cash war chest on-hand, you will ensure you are in a powerful position when it comes to negotiating deals when a real estate recession fully kicks in.
2. Know Thy Market
You should intimately know the market you want to profit from, or have access to unbiased expert advice. You need to know how much the type of property you wish to invest in costs to build on a per square meter basis, so you can know when property is being offered to you below the cost of construction.
Buying property for less than it costs to build is almost always a way to long-term profits.
Know where the prime areas are in the market you want to buy into. Knowing where the most desirable locations are ensures you can cherry pick the best property when below-cost opportunities come your way.
To get the most in-depth market analyses of the broadest range of international markets, you should subscribe to Global Property Advisor—our premium paid service. Click here for more information.
3. Maximize Cash Flow
Also, forget about capital gains in the short term.
During a real estate downturn, your first consideration should be cash flow. There is always a rental market if the price is right.
Rental properties for the local market become more in demand during a recession, and you shouldn’t pay over the current median house price in any area.
High-end properties fall the most in value in a recession and will find it hardest to maintain rent levels. They will also have the smallest resale markets in the short- to medium-term.
Be aware that the lower end of the market can become lucrative in a property market recession. Some investors call these “C grade” rental investments. These aren’t slums, but are smaller apartments with less amenities, in non-prime areas, that cost less to rent.
People who have lost their homes to foreclosure or have had to find a new job will need somewhere cheap to live while they find their feet again.
Rentals in the lower end of the market can often see increases in rent prices during recessions as people downsize and demand in the lower end of the local market increases.
4. Look For Bargains
They are common in areas that have seen too much appreciation, too quickly (bubble markets), and in which prices have started to come back down again. You don’t necessarily have to wait until the market reaches rock bottom to buy value.
While these markets were until recently the hottest markets, now these former bubble markets will see the biggest corrections and the largest number of mortgage defaults as investors’ equity evaporates and foreclosures increase.
As the downturn increases, more opportunities to buy distressed and foreclosed properties at highly discounted rates will arise. If you have the time and can afford to put more effort into finding the best bargains, you can attend foreclosure auctions in your overseas destination of choice.
Talk to a local lawyer before you do so, and bring someone to translate if you don’t speak the language or know the customs.
5. Use Your Forex Advantage
Make sure you take advantage of any foreign exchange bonuses available to you during a property price dip to double up on your investment savings.
Weak real estate values often coincide with a weak local currency, a double whammy that can be used to your advantage.
For U.S. dollar holders, the euro is 4% cheaper than it was a year ago, the British pound sterling is 9% cheaper than a year ago (nice if you’re buying in the U.K., or in Cyprus which trades real estate in sterling), and the Turkish lira has lost 39% of its value in the same time period.
6. Seller Financing
When markets start to feel downward pressure (especially if the market experienced a bubble recently), seller financing deals become more common.
Overleveraged investors will need to offload some or all of their portfolio to reduce their debt burden, but they are doing this when fewer potential buyers are around. This puts you in a strong position to negotiate favorable terms for yourself.
7. Save Money By Renovating During A Real Estate Dip
The best time to renovate your property portfolio is during a recession. During a boom, you can’t find a decent builder or tradesmen for love nor money, but by renovating your overseas properties during a recession you can save a fortune.
During a real estate dip not much construction is going on, tradesmen are out of work, and the price of materials falls. This is the best time to get screaming deals on upgrading your properties, in time for the inevitable property market recovery.
8. Sidestep The Dip
I covered this in a previous OPA issue last month; check it out here. The idea is to cash out of the overvalued market that is starting or about to start a price correction, invest in a short-term, high yielding, asset-backed investment, and buy back into those markets in two years when the property prices have bottomed out.
This allows you to get double dip profits from a recession. You harvest profits when you cash out and you get profits again from your short-term investment.
If you want to hear all about my recommended sidestepping investment that returns a turn-key and fixed 30% in two years, go here.
9. Student Housing
Off-campus student housing is another good investment during recessions.
Not only is the student market insulated from the general real estate market, student enrollment usually goes up during a general recession. People lose their jobs and, realizing that the employment market will be difficult for a while, they decide to take the opportunity to upskill or get a degree that will allow them a career change.
Investment in purpose-built student accommodation in the EU was 11.9 billion euros in the first three quarters of 2022 alone.
Student accommodation is a huge market, and fairly recession-proof too.
10. Retirement Homes
More and more boomers are retiring and needing long-term care every year.
Berkshire Hathaway’s Business Wire reports that the global retirement community market is expected to grow from US$189.3 billion in 2020 to US$285.1 billion in 2025 at a rate of 8.5%. They predict it will then grow at a compound annual growth rate of 5.6% from 2025 and reach US$374.7 billion in 2030.
11. Invest In Primary Markets
Because you know your markets and have kept cash on hand, you will be able to get deals on properties in primary markets that you couldn’t afford before the downturn.
You’ll be able to move from less secure tertiary markets to buy in capital cities like Madrid, Lisbon, and Rome, where tourism demand is always the highest, and you’ll be able to upgrade your portfolio for better locations, schools, town centers, etc. for long-term rental profits.
12. Invest In Less Expensive Overseas Markets
Destinations like Northern Cyprus or Brazil offer first-class real estate opportunities but still attract tourists to vacation rentals during a recession because the rental prices are so much lower due to a much lower purchase price and cost of living.
My favorite low-cost high-end beach destination is Northern Cyprus. I’m excited to announce a new deal to OPA readers. This new seaside resort and wellness center boasts five-star amenities including bars, a restaurant, pools, and a spa and gym. Live And Invest Overseas readers can get an exclusive 4,100 pound (US$5,000+) discount on the units.
While other buyers pay 81,400 pounds, you only pay 77,300 pounds or US$95,900, at this week’s exchange rate. The developer is offering interest-free in-house financing for six years and is projecting an 8% net ROI.
Northern Cyprus has shown fantastic appreciation over the past several years, at 20% per year.
Go here to find out more about this beach opportunity for under US$100,000.
Discounted units are limited, so I suggest you reserve your place today.
13. Keep Your Head
I often quote a truncated excerpt from my favorite poem by Rudyard Kipling when asked about how to deal with a recession:
“If you can keep your head when all about you are losing theirs… yours is the Earth and everything that’s in it.”
It doesn’t rhyme, but it is true.
With apologies to the Kipling estate, a calm head in a crisis coupled with knowledge of the local market is the surest way to secure long-term profits in any real estate recession, crisis, or dip…
Editor, Overseas Property Alert