Why Real Estate Investing in a Recession Still Makes Sense (And How to Do It)
When it comes to investing during a recession, you might be tempted to keep cash by your side and avoid pouring it into an asset. You might be hesitant to make big purchases like real estate, for example. The economy can be unpredictable and market downturns may come out of nowhere… Right?
If you’re a seasoned investor, you know that recessions aren’t all bad news for the real estate market. You don’t have to steer away when you know how the market works to your advantage during an economic downturn—which we’ll explain below.
Read on to find out why real estate investing in a recession still makes sense.
The Current Outlook on the US Real Estate Market
Let’s get one thing straight: economists say the United States isn’t in a recession right now. Our country showed consecutive economic growth of 3.2% and 2.9% in last year’s third and fourth quarters.
Still, experts also foresee that we will hit a “mild” recession in the first half of 2023, depending on the federal reserve’s decision on the interest rate. Several factors will affect the economy, but it’s not happening now.
Just in case the drop does happen, however, here are a few things to keep in mind:
1. Diversify Your Portfolio to Protect Yourself
Imagine if you invested in five single-family properties in a Class A Detroit neighborhood like Dearborn. You only have those five properties, nothing else.
Suddenly, the economy takes a turn for the worse, and people lose their jobs. They can’t afford your expensive rent anymore; they need to move to a more affordable property.
Since you only have Class A properties, you don’t have any options to offer them. You would’ve been in a better position if you had Class B & C units in your real estate portfolio as well to balance your losses.
In short, don’t put all your eggs in one basket, and you’ll manage the ebb and flow of the market. You’ll minimize losses and protect your assets–even when the market becomes volatile.
Here are several ways to diversify your real estate portfolio:
- Asset Type: Residential properties (e.g., single-family homes, apartment units, high-rise apartment complexes, duplexes, etc.), industrial properties (e.g., factories, storage units, etc.), and commercial properties (e.g., for offices or retail spaces)
- Geographical Location: Different real estates markets, like investing in different neighborhoods, cities, metropolitan areas, states, or even countries (although that opens up a whole new challenge!)
- Investment Strategy: Buy-and-hold properties, short-term rentals, flip-and-fix properties, BRRRR method investments, wholesaling real estate, house hacking, etc.
- Property Class: Class A (tenant credit score 660+), Class B (tenant credit scores 600-660), Class C (tenant credit scores 540-00), or Class D (tenant credit scores < 540)
The idea is to invest in different types of real estate opportunities that won’t get affected by the same market shifts. The more you diversify, the less your chances are of getting wiped out in one go.
2. Everyone Needs A Roof Over Their Head
There is enduring value in investing in real estate, especially in rental properties. Regardless of the economy, everyone needs somewhere to call home. People can hold off buying a new car or the latest iPhone, but they can’t live without a roof over their heads—nobody will voluntarily live on the streets.
This constant demand means that there’ll always be a tenant pool for you to secure renters. The type and number of tenants you’ll get will change depending on how the economy behaves, but you’ll never run out of people to take in and protect your cash flow.
That is, as long as your property is well-maintained, strategically located, and charges a fair rent amount. If you’re inexperienced with handling property management during recessions (e.g., screening tenants), you can hire third-party experts to do that for you.
3. Real Estate is Relatively Stable
Real estate certainly is one of the more secure investments you can make.
The value of your property will likely fluctuate a bit over time, but it won’t take too huge of a hit. So unlike investing in stocks or other risky ventures, you’ll remain in the safety zone when it comes to real estate.
Even if stocks have the potential to give you higher returns, their prices are very volatile due to the market. In contrast, real estate prices aren’t as affected by economic downturns. Additionally, more risks come with stocks like inflation, recession, and interest rates. For real estate, your main risks are vacancy rates and tenant turnovers—both of which you can control. Some risks are just riskier!
Investment in real estate should bring peace of mind because you don’t have to sweat the fluctuations in value as you do with stock and other commodity trades.
4. Win the Race Against Inflation during recession
Investing in real estate is one of the most effective strategies for staying ahead of inflation. Not only will you be increasing your wealth through rental income, but you’ll also be positioned to profit should prices go up over time.
Inflation means that the cost of living gets more expensive and in return, purchasing power decreases. In times like this, people aren’t thinking of purchasing a property. Instead, they’d choose to rent instead. All while property values will continue to grow, protecting the value of your investment while the dollar’s value is drying up.
To add perspective, the average interest rate for checking accounts was 0.03% in 2022. In the same year, the inflation rate reached 6.5%. As you can see, there’s no winning when you leave your money in the bank compared to investing in real estate.
So although the market might not always appear the most inviting at times, it’s important to proceed with caution and make decisions that are informed by doing thorough research.
Real Estate Investing During a Recession? No Problem.
Real estate has proven to offer a stable form of investment for decades. Still, it comes down to researching and executing smart strategies—both of which you can do with experts on hand.
Investing in real estate during a recession comes with great financial rewards, leaving you wealthier than you were yesterday. Get in touch with us to start investing in the most valuable cash-flowing assets you can own.