Everyone has heard or seen ads for gold or silver, which is being pitched as a tangible asset and inflationary hedge. But real estate is the ultimate tangible asset with no need to increase in value to offer investors a positive return on investment.
A changing economy requires a change in investment strategy. Many investors and real estate brokers are only effective during periods of inflation and go into hiding during recessions. The cycle of recession and inflation is a fact of life in a free economy, one follows the other as night follows day. If you are successful and have reached your investment goals, moving to Hawaii is a pleasant way to spend a recession. If you are among the majority of investors and brokers who have not yet achieved financial independence, a recession may seriously damage your investment program.
EFFECTS OF RECESSION
What are the characteristics of a recession? Real estate is not valued on anticipated rent or construction cost increases. Loans are hard to find, and cash is King. Unemployment rises as businesses reduce their work force as demand for their goods or services is reduced. Salary increases are smaller or non existent. As a consequence, tenants cannot pay rent increases easily. Businesses will not expand to fill vacant space. Buildings that cannot give an investor a decent return based upon current conditions will not sell. It is a buyer’s market.
Many property owners with break-even or positive cash flows will choose to wait out the recession. They do not realize the relationship between time and the value of money. If an investor has $200,000 net equity in a building and the recession lasts two years, the investor may lose two years’ of equity growth. This is a real loss of value. He may have to retire two years later or may have to live on a reduced income at retirement. If the investor sold his property and took a reduction in price leaving only $185,000 in net cash equity, he would be free to look for bargains that will make up the $15,000 loss plus produce profits far greater than his current property will generate. Holding a property may be the least profitable path to wealth building during a recession.
You must have cash or it’s equivalent to take advantage of a recession. Offset capital gains on a sale with suspended losses. Be prepared to use exchange techniques to preserve your remaining equity. By using the 1031 exchange, alone or in combination with suspended losses, you can reduce your sale price below street value and still preserve the bulk of your equity for reinvestment.
Recession investing requires that you solve someone else’s problem by reducing their liability or giving them cash. Many strategies that would not work during an inflation period are very effective during recessions. Using equity and third party notes as a down payment, employing creative seller financing, consolidating or diversifying through exchanging, equity participation, lease options, etc. are only a few of the many ways investors can take advantage of the difficulties recessions create for other owners. The underlying principle to all recession strategies is not to invest on the basis of anticipated growth. Buy a positive cash flow. Pay less than a property is presently worth. Arrange transferable financing that increases value. Buy in areas that have a strong, diversified economy that will grow once the recession changes to inflation. Buy a property that will survive the recession, no matter how long it lasts, and that will be in position to take maximum advantage of the coming inflation.
This article was originally written and distributed by a founder of Equity Advantage during the early 1980’s. As is often said, the best way to anticipate the future is to have vast knowledge of the past. When we emerge from our current recession we at Equity Advantage will once again return this information to it’s proper filing place, until then we will embrace the proven strategies of the past.
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This webinar video covers 1031 exchange fallacies of 2023 – Seller Finance, holding periods, value and equity requirements, replacing debt in an exchange, and other topics of confusion in Section 1031.
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Welcome to this episode of Advantage TV where our Co-Founders David and Tom Moore explore the crucial aspects of value and equity requirements. In this episode, we uncover the key factors that ensure compliance and help you understand when you’ve satisfied the rules.
The 1031 exchange, often referred to as a “like-kind” exchange, provides a unique opportunity for real estate investors to defer capital gains taxes when exchanging one investment property for another. However, it’s crucial to navigate this process carefully, ensuring that value and equity requirements are met.
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David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.