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Patrick Grimes is the founder of Invest on Main Street, a private equity firm managing passive multifamily investments in emerging markets.

Introduction

As an investor with a diverse portfolio and in-depth experience in the real estate industry, I have experienced and survived many economic “rollercoasters.” And I have always found that downturns, despite their challenges, provide a unique opportunity for rapid portfolio growth. My journey illustrates how to unlock the advantages that exist during downturns, and it provides practical strategies for how to use recessionary acquisitions to do so.

Becoming Intimately Familiar With the Downside of Downturns

My journey started as an ambitious robotics and design engineer. With a steady high income and the excitement of the tech boom, I was inspired to take a significant financial leap by investing my bonuses into the highest returning real estate investment I could find. I chose a highly leveraged pre-development project, placing all my financial resources into this single deal, and I personally guaranteed the loan for it. However, the year was 2007, and I was on the precipice of one of the most dramatic economic downturns in recent history. When the market plummeted, so did my investment. My property was seized by the bank, leaving me penniless and bearing the burden of a foreclosure and debt forgiveness taxes.

Coming Back Stronger: A Lesson in Resilience and Adaptability

This was a disastrous setback, but I wasn’t about to let itdefine my potential. With this resolve, I temporarily took a step back from real estate to recover and focus on enriching my knowledge and honing my skills. I pursued further education, attaining a master’s degree in engineering and an MBA. I soon found myself thriving once more in the robotics and automation field. With a steady flow of income and substantial bonus checks coming in, my financial health was restored. I knew I needed to get back into investing but wasn’t sure how. I researched the investment patterns of the wealthy and successful, and I found that the breadcrumbs inevitably led back to real estate.

A New Strategy: The Tortoise, Not the Hare

My experiences had taught me the importance of cautious, strategic investing. Not speculating on pre-development or new construction in boom economies, but instead focusing on recession-resilient markets, existing construction, and consistent cash flow. I understood that the key was to invest like a tortoise, not a hare. By embracing lower leverages and prioritizing safer leverages, I found success. From a single-family portfolio, I founded Invest On Main Street, scaled up to larger 200+ unit multifamily apartment complexes, and built a recession-resilient and asset-protected portfolio for thousands of investors to diversify their retirement plans in over 4,000 units across 26 properties.

Investing Today: Navigating the Current Economic Landscape

Today’s economic landscape, reshaped by diverse factors like the COVID-19 pandemic, surging inflation, and escalating material and labor costs, presents a unique set of challenges for investors.

Among these challenges, the most significant is the increase in interest rates. The rise has contributed to a decrease in property valuations, a concern that weighs heavily on existing investments and potential acquisition opportunities. This shift is reshaping the entire investment scenario, making it critical for investors to review their strategies and align them with these new realities.

Additionally, there’s been a surge in insurance premiums and taxes, which further complicate the financial landscape. Moreover, an alarming increase in delinquencies has emerged, primarily due to the cessation of government-issued rent relief checks, leading to many residents discontinuing their rent payments. Once the eviction bans were lifted, the backlog extended the typical eviction process from 2-4 weeks to a prolonged timeline of 4-6 months, further straining the resources of landlords and property owners.

This situation, though troubling, needs to be viewed from an opportunistic perspective. It highlights the importance of a diversified portfolio and reinforces the need for strategic and thoughtful investment approaches during these trying times.

Unlocking the Upside During Downturns: Recessionary Acquisitions

One of the crucial lessons in navigating such downturns comes from Warren Buffett: “When others are fearful, be greedy.” I have always hated that quote because the engineer analyst in me wants to not be “greedy” or “fearful,” but instead be calm and calculated in my analysis of the opportunities. But Buffett’s remarks are correct, and times of economic fear are fertile grounds for great deals. During the 2009 and 2010 economic downturns, investors who emerged victorious had a common strategy: they made their returns on the initial buy, focused on distressed operators, not assets, and traded forward quickly.

I detail this process in the following 7 Steps of Recessionary Acquisitions:

1. Immediate Cash Buys

The strategy kicks off with a cash buy, allowing investors to quickly seize distressed assets at the most advantageous terms. Cash purchases often provide the buyer with greater negotiating power and eliminate the extended timeline and uncertainties associated with trying to get a loan in a volatile debt market. This quick initial cash outlay provides the best basis for future transactions, thus setting the stage for rapid expansion.

2. Quick Refinancing

Almost as soon as the first asset is acquired, the next step is rapid refinancing. By doing this, investors can free up their initial capital investment without waiting for the long-term appreciation of the property. This liquidity is critical to the strategy’s speed, enabling the investor to move on to subsequent acquisitions.

3. Purchasing the Second Asset

The capital freed from the refinance doesn’t sit idle; it’s immediately used to purchase a second asset, also in cash. Again, cash transactions are key to this strategy, allowing investors to secure favorable deals swiftly.

4. Sale of the First Asset

As soon as the second asset is in the portfolio, the first asset is sold. The idea here is that if you’ve made your return on the initial buy—thanks to the favorable terms your cash purchase secured—you don’t need to hold on to the property for the long term. With very minimal light effort, you can swiftly move to liquidate and move on.

5. Utilizing 1031 Exchanges

On selling the first asset, a 1031 exchange is initiated. This tax-deferral mechanism, which I discuss in more detail in this article, allows you to roll the proceeds from the sale into the purchase of a third asset without incurring immediate capital gains tax. This exchange isn’t just a tax-saving mechanism; it’s a critical wealth-building tool that allows you to continue growing your portfolio exponentially.

6. Multiplying Assets

By repeatedly applying this method, investors can quickly turn one property into two, then two into four, and four into eight, all in a short amount of time. This high-velocity strategy stands in stark contrast to traditional long-term buy-and-hold methods. Rather than waiting for the asset to appreciate — or investing in costly improvements that may not keep pace with deflating market prices — the emphasis is on quick, calculated moves to step up the portfolio growth at each acquisition.

7. Rapid Portfolio Diversification

The end result of this high-velocity strategy is not only rapid growth, but also rapid diversification. With each new asset acquired, the portfolio becomes more diverse, helping to spread risk and potentially providing a buffer against market fluctuations.

Timeless Investment Principles — Even in Recessionary Times

Despite the changing economic climate, certain traditional investment principles remain crucial. One of the most fundamental is maintaining healthy cash flow. Although generating considerable cash flow today might be challenging, this can be eased by adopting an investment strategy that prioritizes the swift expansion of holdings. It is also critical to maintain a low loan-to-value ratio on refinanced loans, limited to around 50% to ensure stability in cash flow and valuation during short-term holds.

Securing adequate insurance and reserves and investing in recession-resilient asset classes and markets adds another layer of security. These principles, when combined with a strategy focused on swift capital expansion, can offer rapid and diverse portfolio growth.

Winning in Downturns Starts With Your Decisions Today

In times of economic uncertainty, it may seem safer to sit on a pile of cash. However, doing so would yield a negative return, especially with the limited window of opportunity we currently have.

To truly unlock the upside of downturns, it is crucial to adopt an investment strategy that turns challenges into opportunities. It’s during these times that investors have the opportunity to grow, transform, and achieve long-term success.

Remember, economic downturns are not dead ends; they are detours to better opportunities. Embrace them and make the most of your investments. The journey might be difficult, but the rewards are undoubtedly worth it.

However you choose to invest, it always starts with a foundation of knowledge. Do your research, talk to your CPA, and make sure you feel confident in your decision.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.