For the past three years, I’ve been warning investors: “If you buy something now, it will be worth less sometime in the next three years because a recession is coming.” We are way overdue for a correction. However, a pending downturn does not mean you stop investing. It just means it is time to start investing differently. In fact, most investors have started making these changes already in both the residential and commercial sectors.
First of all, you’re probably already looking at more properties to find good deals. In my business of commercial real estate, we used to look at about 100 properties for every one property we purchased. Today, we’re looking at about 500 properties for every one purchased. The market is shifting toward value-add properties, where there is opportunity to put in capital to raise value.
Second, you may make different improvement decisions. Speaking of value-add properties, if you were buying residential properties, making upgrades, and then renting them or selling them, you probably have been making them more attractive by putting in granite countertops, painting, etc. That’s fine, but more investors are seeing better returns by shifting their attention away from residential upgrades and toward operating expenses, like reducing costs of electricity, water, and various other utilities. There are presently strong incentives from government-related lenders and others like discounted interest rates for these improvements, so you could pick up as much as a 25 basis-point reduction in your loan rate, which amounts to a much better return than on “classic” improvements. This may change the types of properties you purchase. This trend is also enabling investors who were mainly residential investors to move into other areas of commercial real estate as the value-add trends change.
Third, you must consider our country’s changing population. Our population is aging, and residential assisted living and skilled nursing and healthcare facilities will continue to experience increasing demand. That part of the population is going to continue to affect real estate trends and their demands will shape opportunity especially if we enter a recession.
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