Around every ten years, the U.S. has a major recession. By paying attention you can make very easy and large returns in about a year. I decided to share this information for the potential upcoming fire sale.

My first time taking advantage of recessions was in the 2008 recession where I made over $450k in a single commercial property purchase in 2009. I used $450k in cash and a loan for $400k loan to purchase a $1.3 million commercial property. I essentially made $450k the day I finalized the deal. I started receiving offers a year after purchase.

Now that I have your attention, I will tell you the story of the poor sucker who lost his shirt only to hand it to me. Bob owned a construction company in 2005. Bob was really good at what he did. He kept getting contract after contract. He couldn't lease enough equipment and was buying new $700k dollar heavy equipment brand new with loans the commercial banks were handing out like candy at a doctor's office. Bob didn't mind. He was spending money to make money, and he was making it hand over fist.

Then the 2008 crash came. New construction came to a halt, but Bob's loan payments didn't. Bob could sell his extra heavy equipment but only at 30% of what he paid for them. This was nowhere near enough to pay the principle on his loans. Bob went to the bank for more loans. He is a business man. He just needs a line of credit to float until the recession is over.

The problem is that all of the banks loan officers who were getting bonuses just a year ago are now being grilled for irresponsible lending. These loan officers are now only willing to lend money to people who don't need it anymore. They want enough collateral to keep the loan solvent. Bob is not that person. Most people aren't. The crazy thing is that loan officers are under even more pressure to lend. If you give them a deal they can get behind, they will bend over backwards to push it through for you. It will still take longer due to new rules from shit hitting the fan though.

Bob was now staring down the barrel of bankruptcy. He personally guaranteed these loans because that's how it works. Bob has to unwind before a court does it for him. After simmering for about a year, Bob will relist everything at a price that will get him out from under the loans without having his life reset. This is where smarter businessmen extract valuable assets from Bob at a deep discount. Paying market price for anything is for suckers. Don't be a sucker.

So the entrance is so easy that it seems obvious when you think about it for a moment. So why doesn't everyone do this? How do you ascend from being the small fish getting pillaged by local big fish to being the big fish doing the pillaging? The secret is the exit.

Immediately after purchasing this property, I was able to turn it around into enough income to get a net positive cash flow on the property although not that much in the beginning. Most of my profit was from paying down the mortgage principle and holding for appreciation back to market value. After the market recovered, I had essentially doubled my money. My rents increased and I was able to renegotiate my loan from 8% to 5%, making me even more money. Life was good.

At this point I could have sold but I didn't. Why? It's not time for exit. Yes, I could have realized a lot of profits, but I would have been hit with short-term capital gains. This is a big no-no. Big fish don't pay income tax. They pay long-term capital gains. This is why Warren Buffet pays a lower tax rate than his secretary. On top of this, what are you going to do with that money? Having it sit in your checking account is just wiping your ass with it. You could put it into another property, but you will be paying market price which is pointless. Hold it for now.

After the economy recovers, you can once again go back to borrowing money to make money. Just watch the calendar. After about five years, you should not take anymore leverage you will guarantee. You should start winding down your more highly leveraged positions as the boom market goes into full swing. At this point you could sell the property you bought at discount for a ridiculous price that only Bob would pay. I chose to hold mine because it has enormous upside potential waiting on more suburban and road development in the area. If you do hold, you can still re-leverage the property later to fund later purchases. This moves you from paying the already low long-term capital gains tax to paying no tax.

Note 1: You cannot predict the timings of busts. Anyone telling you otherwise is selling you something. Always have a plan for if the economy bursts tomorrow. Walk into deals with that in mind. Most people are so thoroughly hosed because they think that good times are forever in the booms and bad times are forever in the busts.

Note 2: Amazon and the COVID-19 are going to wipe out most retail. Keep that in mind if you shop for commercial properties. Stick with properties that will serve business that cannot be replaced by Amazon in the next five years.

Note 3: Commercial loans are not residential loans. Be aware of when the bank can call your loan even when you are making payments.

Note 4: You can also find great deals at trustee sales but trying to leverage the purchase is difficult to impossible. Having another property you can leverage for cash is helpful here. Walking in these with a fat stack of cash is a great way to make money but much riskier. If you don't have a lot of cash for the bigger deals you will have to fight the idiots who just read the latest Get Rich Quick book.

Note 5: Although this seems geared towards realty, these principles hold for all capital-intensive businesses. This is why large corporations sit on mountains of gold like dragons and devour the assets and customers of smaller competitors during downturns.

Lessons Learned

  • Don't over-leverage yourself. Don't be Bob.
  • Buy Bob's stuff for pennies on the dollar.
  • Sell Bob his stuff back for more than it is worth.
  • Leverage is an important tool if you respect it, know your risks, and use it wisely.
  • If you don't know and act like your income can go to zero for two years and do not plan for it, you will be taken advantage of by someone who does.
  • Do whatever you can to turn your profits into long-term capital gains.
  • Even better, hold and don't pay taxes.

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