How to Spot Once-in-a-Decade Real Estate Opportunities and Make Your Fortune

The following is adapted from Catching Knives by Jake Harris.

Recessions present the opportunity to “catch falling knives,” the rare chance to buy a property for far lower than its value. This differs from the advice commonly given about the stock market: “Don’t try to catch falling knives.”

To illustrate the difference between the stock market and the real estate market, imagine that you buy a share of Tesla for $500, but it quickly falls to $300. That’s a bad situation because, ideally, you’d want to wait until the price bottoms out at $300 before buying in, at which point you could buy as many shares as you want. However, in commercial real estate (and real estate in general), there’s not a nearly unlimited supply of properties available like there are stocks. You might find an office building in San Antonio, or whichever market you’re interested in, falling in value or coming into distress only once a decade. You may not have the luxury of waiting until the price bottoms because there is only one property. All you would need is one other interested buyer to purchase it and your opportunity would be over. Like in the case study above, we vowed we would be ready for the next foreclosure sale of finished lots, but that opportunity never happened again — you need to catch the knife while it’s falling.

Even if the value of a property is still declining when you buy, as long as you buy at a discount from its fair market value (FMV) or after repair value (ARV), you’ll have the opportunity to benefit from the tremendous rebound in valuation when the recession ends. Scarcity plays both to your advantage and your disadvantage in real estate. The advantage is that if you can “grab a falling knife” in a strong market, you can reasonably expect the value to rise again. There’s only so much land in a given real estate market, so there will always be a demand for property. The disadvantage of scarcity is that you’re competing for limited inventory. If there’s only a single property in your chosen market that fits your investing criteria — for example, a distressed hotel — it takes only that one other interested buyer to snatch the opportunity away from you. It might be ten years before another distressed hotel comes on the market. Whereas with stocks, if ten people believe Tesla is underpriced right now and decide to buy, you can come in as the eleventh, hundredth, or thousandth person and still purchase that stock.

With commercial real estate, you can’t always wait for a price to bottom out — it’s more important to beat the competition and close a good deal while it’s available. That’s not to say you should rush your decisions but rather to emphasize the importance of being prepared to execute your investment plan when the right opportunity presents itself.

Recognizing Other Types of Distress

Distress happens during healthy markets whenever something goes wrong for a property owner. Maybe the owner goes through a divorce, accrues medical bills, inherits a property they don’t know how to manage, or loses their primary income stream. In any case, something happens that compels them to quickly sell their property — at a discount, if necessary. If you have a plan in place and are ready to act, you can be the person to buy their property at a discount.

Distress can also happen on a larger, but still local, scale if, for example, the factory that employs many residents of a town closes. All of a sudden, nearby restaurants lose their lunch business and also need to close, causing the commercial properties to go into foreclosure. Those properties will then come back onto the market at a deeply discounted price.

These types of isolated deals can occur anywhere and at any time, but again, I’ll focus mainly on recessions because it’s during these periods when many deals will be available all at once. Discounts abound during recessions, making recessions the best time to buy.

Be an Investment Contrarian

Along with being patient, success in distressed commercial real estate investing involves being a bit of a contrarian. To get the best bargains, you have to go against the crowd and follow investment strategies that other people are either too afraid of or too unaware to take.

To get ahead, you can leverage two significant emotions that factor into all of investing: fear and greed. There’s the fear of missing out (FOMO) on an opportunity and the fear of losing your money, and there’s the greed of holding on to investments too long as I discussed earlier in this chapter. Most people don’t control these emotions and instead let them influence their decisions. However, if you can wield them to your advantage, you can make a fortune during recessions.

The best way to control fear and greed is by having a plan and committing to follow it. When you don’t have a plan, it’s easy to give in to your emotions because you have nothing else guiding your choices. When the fear of failure becomes overwhelming, you buckle. But a plan keeps you on track and sets rules for how you invest. It moves you forward despite fear and also prevents greed from convincing you to hold on to properties for too long.

Many people, myself included years ago, feel scared when they first start in real estate investing because they don’t know what to do. I overcame this fear by researching and learning all I could before making my first investment. But the reality is that 80–90 percent of people will never get over their fear — they won’t succeed in real estate investing because they’ll never even start. Instead, they’ll opt for the same investment vehicles as everyone else: stocks, bonds, REITs, and others. There’s nothing wrong with these options, but they don’t hold the same potential for enormous returns on your investment that you can get from distressed real estate investing. Remember, recessions present the greatest opportunity for deals because there’s blood in the streets. Most people will be too afraid of the uncertainty to act. By being part of the herd — an average investor — they cannot expect to outperform the markets and get a different outcome. You need to act differently to get exceptional results: be a contrarian.

To be clear, you will always feel some fear and uncertainty because investing always involves some level of risk. Especially during recessions, nobody knows for sure what the future holds. In the middle of a recession, it might feel like the market will never recover. The goal is not to eliminate fear entirely but to minimize negative emotions and the risk that feeds them by having a plan.

In my book, I’ve laid out a guide to creating your investing plan, which will help you overcome fear, prepare you to take action during the next recession, and set you up to earn the financial freedom you want. The why is your motivation to achieve financial freedom and will be your first defense against fear. It’s a goal you can focus on right now, before we even get into the more technical details of real estate investing, and your why can give you the courage you need to take the next step toward getting off the hamster wheel.

Stepping off the hamster wheel isn’t comfortable — if it were, everyone would do it — but with knowledge, you’ll gain the confidence and direction you need to take your first steps. You can read about eating healthy and working out all you want, but unless you actually eat healthily and work out, you won’t see the results. It’s the same thing for financial freedom. You can read my book and others, but until you take action, you won’t see any results.

Tips and Takeaways: The Best Time to Buy

• Recessions are the best time to invest in commercial real estate because you can get the biggest discounts. During recessions, many people will be afraid to act or will be overleveraged and compelled to sell property under value.
• If you can overcome your own trepidation during recessions, you can “catch knives,” the once-in-a-decade opportunities to buy distressed property for far lower than it’s worth, and you can make a fortune.
• Discounts caused by isolated instances of distress can happen anywhere and at any time, but you’ll find the most opportunities for good deals during recessions.
• Every recession is unique, but they tend to follow a similar pattern: they’re almost all caused by an oversupply of a particular asset class followed by a crash in price and, eventually, a correction and new equilibrium.
• Recessions often aren’t predictable, so you can’t time them. Instead, you should be ready to act when opportunity strikes. This means being patient and having an investment plan prepared ahead of time.
• Succeeding in commercial real estate investing means being a bit of a contrarian. It’s not comfortable going against the crowd, but in doing so, you can earn returns that far outweigh the average.

To learn more about smart real estate investing, Catching Knives is available on Amazon.

Jake Harris is the founder and managing partner of a private equity real estate firm that has managed, developed, and acquired more than $200 million in assets under management in the last five years alone. Jake has a master’s degree in international real estate and is a licensed California broker and recognized expert in opportunity zones, infill development, construction cost-control systems, and the scaling of distressed investing business. To learn more about creating financial freedom through real estate investment, visit www.catchknives.com.