(MONEY Magazine) – You've no doubt heard various experts blabbering about when the next U.S. recession will strike. Ignore them. In reality, slumps are more local than national. According to pollster Albert Sindlinger, anywhere from four to 31 states have been in recession at any given time since summer 1986. Still, you can prosper when a downturn hits if you look for opportunities in adversity. Brooks McCabe of Charleston, W.Va., for instance, cleaned up after his area's real estate prices stagnated. Dolores Barnes started a successful clothing store in Dallas as other retailers were giving up. And Bob Scudder of Rockingham, N.C. staffed his nascent tool-and-die shop from among those his former boss was laying off. The moxie of these recession beaters offers lessons to you if a slump ever heads your way.

The real estate man: Applying a distress-for-success formula

It's said that when the nation's economy catches cold, West Virginia gets pneumonia. The state depends on its mineral and chemical industries, and when demand for industrial commodities slackens, local wages, spending and real estate values get whomped. In fact, West Virginia, where the 10.8% unemployment rate is nearly double the national average, is still recuperating from the 1981-82 recession. Yet as Brooks McCabe, 39, sees it, the weak economy in his hometown of Charleston has presented some exceptional real estate buys. ''In a recession,'' says McCabe, ''people overgeneralize about a real estate market and stay away from all properties. But an investor who dissects the local economy can find good values.'' And how! Since 1980, McCabe and his equal partner, Rudy Henley, have amassed a 500-unit apartment empire worth more than $7 million. Observes Mark Leevine, a University of Denver real estate professor: ''The person who makes money in real estate is usually a & contrarian, a Donald Trump on a small scale.'' Physically at least, McCabe looks more like Broadway's impish Joel Grey than Fifth Avenue's haughty Trump. But professionally the comparison seems apt. In 1980, when McCabe and Henley formed their commercial real estate firm, McCabe- Henley Properties, McCabe had recently left a $25,000-a-year state job as director of housing for West Virginia and was working as an agent for Home Finders, a local real estate brokerage where his wife Barbie, 35, and Henley also were agents. Four years after the men left to start their firm, Barbie joined them as the bookkeeper and advertising manager. Today, Brooks pays himself $35,000 a year, and Barbie earns $12,500. She works only about 25 hours a week so she can spend time with their daughter Katie, 7. McCabe began his business with almost no money down. He and Henley each invested $1,000 of savings. The rest of their start-up capital came from commissions on a few office buildings, a fee for syndicating an apartment building and a $50,000 bank credit line. After losing early bidding wars against wealthy out-of-state investors -- and dropping more than $50,000 through 1984 -- McCabe-Henley has shown steady profits and growth since 1985. ''Brooks and Rudy went through tough periods when they didn't know if they could keep the doors open,'' Barbie recalls. Now they concentrate on apartments that have little competition because syndicators want larger properties. McCabe's apartments in and around Charleston provide an annual cash return of 9% to 11%, a couple of percentage points more than the national average. In addition, the investments let him shelter from taxes about $20,000 a year, nearly half his family's income. His six-pronged investing strategy goes like this: -- Look for a building 10 to 30 years old ''in a good location ((that)) . . . its owner has not maintained.'' -- Be sure the property has roughly 50 to 150 apartments; smaller buildings are too labor-intensive and larger ones often command inflated prices from syndicators. -- Spend 3% to 5% of the purchase price to make the building sparkle with, say, a spiffier lobby. ''Add a little gingerbread so that when people drive by, they think about renting,'' says McCabe. -- Offer tenants incentives to keep your vacancy rate below 3%. For example, McCabe sometimes pays a renter $100 for bringing in another. ''If your best friends live where you do, you are not likely to move,'' he says. At one complex rented largely by people in their twenties whose only significant assets are cars, McCabe plans to install a $4,000 drive-in car wash and give tenants plenty of tokens to use it. He expects to recoup the investment in a year as tenants attracted by the car wash cut his vacancy rate. -- Raise rents annually as much as you can, aiming for increases that at least equal the local inflation rate. The improvements you make will justify the higher rents. -- Plan to hold the building for five to 10 years -- long enough for it to have a healthy price gain. A prime example of McCabe's ability to turn a lemon into lemonade is the Regency in Ravenswood, W.Va., 40 miles north of Charleston. He bought the one- story, 48-unit complex for $500,000 in 1981 with cash from local investors, a variable-rate mortgage and a 10% fixed-rate note. Six months later 2,133 employees of Kaiser Aluminum, the largest employer in town, were laid off or took early retirement, idling roughly half of the town's work force. While many frightened landlords just watched, McCabe polled his tenants about which improvements they wanted and then spent $150,000 on new roofs, carpets and fences. The payoff? By year's end McCabe cut his vacancy rate in half, to 2%, while raising rents 20%, to $190 a month for a typical one-bedroom flat. Last March he sold the Regency for $895,000, clearing a 17% average annual after- tax return. McCabe's concentration on his real estate investments, however, has made him somewhat myopic about other aspects of his personal finances. For example, he has no pension or disability plan: ''My retirement income is the equity I'm building from real estate, and disability insurance is expensive.'' (In truth, a disability policy that would pay him $26,400 a year would cost him only about $100 a month.) The family's sole savings are $30,000 of cash value in Brooks' $200,000 universal life insurance policy, $75,000 in Southern California Edison stock (yield: 6.7%) and a few local bank stocks. The couple are putting off planning for Katie's college education until she's 10. The McCabes are conservative about spending and borrowing, though. ''We've definitely been on an austerity program. No lavish vacations. We drive instead of fly,'' says Barbie. In addition, Brooks hopes to pay off the 8 1/2% fixed- rate mortgage on their $110,000, four-bedroom brick colonial by 1993, 15 years ahead of schedule. ''I live and die by debt in my deals,'' says McCabe. ''But I want to keep my personal debt low now. That way, if I need cash to invest in a property, I can put a mortgage on my house and get some money quickly.''

McCabe's recession-beating tips: ''Don't invest in real estate in a recession area unless you will get a rate of return that compensates you for the extra risk. I'd take an 8% annual cash return in a boom economy, but here I aim for 9% to 11%. Ask your tenants what they want, and try to give it to them as you raise rents. Read books on property management. Two I like are Practical Apartment Management by Edward Kelly ((Institute of Real Estate Management, $28.95)) and Managing Residential Real Estate by Paul Lapides ((Warren Gorham & Lamont, $68)).''

The shopkeeper: Riding the rag trade to riches

J.R. Ewing was not the only Texan to lose his company recently. In Dallas alone, more than 3,500 businesses have been sucked under by the state's depressed oil-dependent economy over the past three years. Only someone as determined or rich as J.R. would start a new business in such a climate -- and perhaps especially in such a consumer-sensitive sector as retailing. Sakowitz, for example, a well-known 86-year-old Texas specialty chain, filed for Chapter 11 bankruptcy protection in 1985, and many smaller Texas retailers have also closed their doors. Dolores Barnes, 41, isn't as rich as J.R., nor at all mean. But she is determined. After leaving her job and getting rejected by various potential creditors, she opened her own clothing shop for full-figured women called Dolores' in August 1986. In 1987 it posted gross profits of $65,000. Says Barnes, who pays herself only $250 a week: ''No time is ever the right time. I just knew I was going to make it.'' Barnes' confidence stems from the fact that she was no rag-trade rookie. She had worked at Neiman-Marcus in Dallas since the late 1960s, heading the full- figure department during her last three years there. As a divorced single parent raising Pamela, 21, and 17-year-old fraternal twins Tara and LaDara, she had for years counted on the security of her salary (approximately $30,000 when she left the store in 1985) as well as on her medical benefits and the prospect of a generous pension in her golden years. But she was also tired of the frequent trips to branch stores that the job required, and she wanted a change. So in August 1985 Barnes went to work as a manager for Fair Woman, a three-store Dallas clothing chain. Within eight months, however, doctors ordered her to take an eight-week medical leave for surgery. Barnes says her new employer was upset about keepingthe job open so long for a new worker -- an attitude that bothered her and made her determined to set out on her own. ''I had made lots of money for two other stores,'' she recalls. ''I knew I could do it for myself.'' Encouraged by friends in the retail business, she made the break from Fair Woman in May 1986 and, just a few weeks after her surgery, started dialing up real estate agents in search of a suitable location for her own store. Within a month, she found one -- a 1,100-square-foot space in an 85-store south Dallas shopping center at $1,000 a month. Barnes applied to eight banks for financing but was turned down, she says, because she had never owned a business and did not have enough collateral. To open the store, which features personalized service from the owner and prices ranging from $100 to $800 for dresses and suits, she put up $5,000 of the $20,000 she had in savings at the time and took a $10,000 loan from a friend. Initially the confident, cheerful native of Bastrop, La. worked 12-hour days seven days a week at Dolores'. She now spends 50 to 60 hours a week at the store, using her spare time for Baptist church work and her duties as a member of the board of the merchants association for the Wynnewood Village shopping center where Dolores' is located. Barnes also coordinates several annual charity fashion shows, gives career seminars in local high schools and is active in the National Council of Negro Women and the NAACP. Her dedication to her store and community has helped produce monthly gross sales of $11,000, up from $6,000 when the store opened. A frugal management style hasn't hurt, either. ''I turn off lights, keep the air-conditioning unit on low and don't make many long-distance calls,'' she says. Now she is even thinking about opening a second store in Tyler, 90 miles east of Dallas. Tyler, a town of 80,500, is appealing because it has three colleges with a total enrollment of 15,000 and, says Barnes, no top-quality shops for larger sizes. Barnes also hopes to open several more stores, in and out of Texas, over the next five years. Her ambition is understandable. The sales potential for full-figure clothing, according to retail analysts, is more than $6 billion annually, and Barnes is confident that customers & everywhere will respond readily to her personal touches. For example, she frequently puts in special orders for valued customers and calls them when new merchandise arrives. Barnes lives modestly in a three-bedroom brick house in the Oak Cliff section of suburban Dallas. Her 8 1/2% fixed-rate mortgage, which she took out in 1970, costs her only $220 a month. Utilities, food and miscellaneous expenses take another $300 a month, leaving Barnes' personal budget strained. ''I don't have money to spend, and I don't splurge,'' she says. Barnes has not taken a vacation since opening Dolores' and cannot recall the last time she went to the movies. Barnes remains enthusiastic about the future but wistfully admits: ''I'd love Mr. Right to sweep me off my feet.'' But she adds, ''Still, I know that God is up there watching over me and will take care of everything.''

Barnes' recession-beating tips: ''If you know what to anticipate, you can run your business profitably even in a slow economy. Cater to a specific niche. For example, I won't sell clothing sizes smaller than 12. Run your business as if it were your home, and don't be bashful about letting friends help for free. Mine help dress the windows and serve as my models for the fashion shows.''

The toolmaker: Knowing when to quit was the key

Nothing gets a recession rolling in a small town like the largest local employer closing down. Just ask Bob Scudder. In 1983 he was the local quality- assurance manager for machinery maker Clark Equipment, whose 1,000 workers made it the largest private employer in Rockingham, N.C. (pop. 8,300). At the time, Japanese competition and a rising dollar were overwhelming U.S. heavy- machinery companies as well as North Carolina's textile firms. Clark finally closed its Rockingham gates in 1986, reassigning some but leaving many out of work. But not Scudder, now 43. He had quit Clark two years earlier and started the area's first tool-and-die shop. Last year his company, Sandhills Tool & Engineering, employed 27 people, took in $1.2 million and posted a 15% pretax profit margin. Scudder, a cheerful, beefy fellow, paid himself a modest $50,000 in salary, preferring to reinvest the profits in Sandhills. An engineer and toolmaker by training, Scudder moved from Warsaw, Ind. to Rockingham in 1978 (''I'm a Yankee rebel,'' he now says) with his wife Gloria, 43, a nurse, and their daughters Jennie, 22, and Pam, 21. Back then, business was booming for Clark. ''I felt I'd probably retire with them,'' says Scudder. His salary and Gloria's part-time job at a hospital brought in about $30,000 annually. Clark piled on the perks too -- a pension plan, a company-matched 401(k) savings plan and health and life insurance benefits. Swinging the cost of living was easy. The Scudders paid a mere $55,000 for their four-bedroom house. The monthly mortgage: $400. By 1982, however, business was starting to turn bad at Clark. Early in 1983, says Scudder, management told him that plant layoffs would soon begin and that operations would probably be shut down in a few years. Still, Scudder was luckier than most. ''They told me I could get another job with the company somewhere else,'' he says. Instead, Scudder and his friend Tom Wheeler, who owned an auto-parts business in Rockingham, considered the news the perfect signal to open a tool- and-die shop to do precision metalworking for the region's cost-conscious manufacturers. The way they figured it, Clark's skilled machinists would need work, and soon Clark's equipment would be for sale on the cheap. They also knew North Carolina needed another such business. ''Up North, there's a tool- and-die shop on every street corner,'' says Scudder. ''I thought if I set one up here, I couldn't help but be successful.'' Gloria Scudder, who does not care for rural Rockingham, which is about 75 miles east of Charlotte, was not keen about her husband's business venture. ''I wanted him to move to another Clark plant or to a big company elsewhere,'' she says. ''This town is small, and it's hard to make friends here.'' Her husband, an optimist and born salesman, recalls, ''Gloria thought I jumped off the deep end. But I knew as long as I could talk and move I'd make a good living.'' Neither Bob nor Gloria worried that Bob's uncertain income might jeopardize their daughters' college education. When he left Clark, Scudder received $50,000 total in severance and 401(k) savings. He planned to use this money for the college bills. The daughters, however, had mixed feelings. ''My oldest was scared to death, but my other one was all for it,'' recalls Bob. Compromising with his wife, Scudder decided in November 1983 to start Sandhills Tool & Engineering as a part-time business, keeping his Clark job, salary and benefits. But he had no fallback plan in case his business flopped. Every day after work and on Saturdays, Scudder and Wheeler met in the back of / Wheeler's auto-parts shop. On weeknights they worked at the machines from 6 p.m. until 11 p.m. Neither man invested his own money in the business. ''Our bankers didn't understand why we didn't put any of our own cash into the company,'' says Scudder. ''The reason was simple: we didn't have any.'' Wheeler already owned a milling machine and a lathe, and Scudder used them to craft tools and gauges that other manufacturers needed for making products. Steady orders, short-term bank loans and $20,000 of small-business subsidies from state government agencies provided the financial fuel to keep their tooling machines humming. Because Sandhills began in the midst of a depressed economy, the state money paid half the salary of some of its workers for six months, plus training costs. As business grew -- sales poked above $100,000 in 1984 -- Scudder and Wheeler realized they needed to devote full time to the company. ''Work was falling out of the sky,'' says Wheeler. So in 1984, while local unemployment was 13.9% (compared with 7.7% nationally), Scudder left Clark, and Wheeler sold his auto-parts business. Says Wheeler: ''It took a lot of guts for Bob to give up his corporate job and its perks with two kids in college.'' But as the saying goes: no guts, no glory. Today, Scudder says his personal net worth is triple its 1983 level, though he declines to give an exact figure. Rockingham has gained strength too as the falling dollar sprayed starch into the textile industry. Fruit of the Loom bought and refitted Clark's plant in 1987 to make underwear there, and has hired 650 people. The current unemployment rate: only 5.3%, slightly under the national figure. The Scudders have put much of their nouveaux riches into real estate. With weekends in mind, they bought a Myrtle Beach, S.C. beachfront condominium for $89,000 (monthly mortgage: $900). Bob hankers to buy more Myrtle Beach condos as rental-property investments. Last fall, the couple sold their house for $95,000. ''I never liked the house,'' says Gloria. ''It had no formal dining room or garage, and we never used the swimming pool we built.'' They are now renting an apartment while awaiting the completion of their new $130,000, three-bedroom home being built on 2 1/2 acres atop a woody cliff. The Scudders hope to move into the house this month. Their monthly mortgage payment will double to $800, but Scudder is not concerned about the extra expense because he is full of ideas about ways to expand and diversify Sandhills Tool % & Engineering. ''We might lease machinery or buy and sell used equipment,'' he says. Wheeler toys with taking the business public someday. Meantime, they both know they must keep their customers happy, including one that has become among their biggest: a Clark plant in Statesville, N.C., 100 miles away.

Scudder's recession-beating tips: ''Get your financial house in order. When I started Sandhills, I had no debts except my mortgage. You can start a business for a lot less than you think. If you are in a depressed area, ask state government agencies to help you cut costs and get the company off the ground. Don't make a quick break from the company you work for. Let your new business grow gradually.''