This article was originally written and distributed by a founder of Equity Advantage during the 1980’s. As Winston Churchill stated; “Those who fail to learn from history are condemned to repeat it” and therefore the best way to anticipate the future is to have vast knowledge of the past. As a company we at Equity Advantage have experienced times such as these many times before, this experience empowers us moving forward. If you have questions regarding 1031 Exchanges during difficult times, or wish to use your IRA and/or 401k funds for off Wall Street investments we are here to assist.
When we emerge from our current situation we at Equity Advantage will return this information to it’s proper filing place, until then we will employ the proven strategies of the past.
Best of health to all!
The Advantage Team
DID YOU KNOW?
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
We are now in a slow down. What are the characteristics of a recession? Cash is king. Real estate is not valued on anticipated rent or construction cost increases. Loans are hard to find. Unemployment rises as businesses reduce their work force in preparation for a reduction in demand for their goods or services. Salary increases are smaller. 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. One that will be in position to take maximum advantage of the coming inflation.
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The Guys With All The Answers…
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. About Us…