When a recession sets in, some of your investments, especially the value of your stock portfolio, may take a hit. But if you’re invested in real estate, you can hedge against the recession since real estate is known to gain value, or build equity, over time – both as you pay down your mortgage as well as experience home value appreciation.
For many years people have turned to real estate as the most practical investment choice. Still, if the economy goes into a recession you may wonder if investing in real estate is a good idea.
In fact, economic downturns can create opportunities for real estate investors. It may seem counterintuitive to be investing in real estate during a recession, but if you want to be well positioned when the economy rebounds, it might be time to make that move.
Real Estate During a Recession
Generally speaking, when a recession is on the horizon the real estate market experiences a shift. Real estate prices relax, and the market shifts from being a seller’s market to a buyer’s market. Borrowing becomes difficult, which makes it challenging for people to buy and sell homes. As of December 2022, many economists think that the United States is currently in a recession, or certainly headed for one in 2023.
A shrinking economy with people prioritizing spending on essentials is the hallmark of a recession. While companies could slow down hiring or lay off workers, the real estate market can provide some stability for investors when the economy slows. Compared to other investments, such as stocks or businesses, the real estate market has been, and will continue to be, more stable in the long run.
Because housing is always in demand, the most significant type of investment during a recession tends to be residential properties. While commercial real estate may be more profitable, people always need a roof over their heads, and generally home values don’t wildly fluctuate with changing economic conditions. So investing in real estate during a recession comes with opportunities.
Reasons to Invest in Real Estate During a Recession
Real Estate Continues To Appreciate In Value
Over the last 70 years, despite several recessions, real estate values have continued to appreciate. In fact, there have been instances where the values have increased even during the recession itself. But even if an economic turmoil causes a hot housing market to cool down, that’s still great news for investors since this could potentially open up opportunities to purchase properties at discounted rates.
Housing is Always a Basic Need
The best investment during a recession is residential properties. Since it’s a basic need, there’s always a demand for housing, no matter what else happens. You can delay buying a new car or phone, but people always need housing.
You won’t have considerable difficulties finding tenants if your rental property isn’t neglected. Proper management of your properties and buying your home in a great location are crucial to maximizing the benefits of your investment property.
Compared to Other Investments Real Estate is More Stable
Compared to other investments such as stocks, Government bonds, Certificates of Deposit, Mutual Funds etc., real estate is more stable in the long run. According to business and capital news giant Bloomberg, stocks are unstable in nature and can easily be affected by economic crises.
On the other hand, recession has minimal effects on real estate. And since real estate is a physical, tangible investment, you can put it to use even if its value decreases. So, investing in real estate during a recession is an excellent hedge against inflation.
During a Recession Residential Real Estate is Better Than Commercial Real Estate
You might think that commercial real estate is more dependable and profitable than residential real estate. But, since people need a shelter over their heads, homes aren’t subject to global economic conditions to the same degree so they make for good investments.
If our experience with COVID-19 taught us anything, it’s that commercial real estate isn’t as stable or profitable as once thought. Many businesses closed down, old and new, whether by economics or by force. Today, the value of commercial real estate is experiencing external threats, such as supply chain issues, rising fuel costs, and many workers who don’t want to return to the office.
Residential homes, on the other hand, aren’t impacted by the economics of business and the global economy. People need a place to live, regardless of what’s happening in the world.
What to Invest in During Recession
As previously mentioned, businesses could suffer losses in a recession, that can lead to instability in commercial real estate investments, while housing will always be in demand. And, while a recession won’t automatically lead to a drop in property values, it can cause a hot housing marking to cool off, which could improve prospects for you to buy properties at a discount.
Here’s a list of property types to look at investing in during a recession:
- Duplexes, triplexes, and quadplexes
- Multifamily homes
- Single-family homes
- Townhouses
- Condos
- Apartment buildings, apartment syndication, and real estate partnerships
A Couple of Things to Keep in Mind When Buying Investment Properties
LocationÂ
When thinking of purchasing investment properties during a recession, consider the location to be as important as the property type. Look for areas with stable employment and job growth potential. Due to the rise of remote work and a desire for more space there has been a significant shift towards the suburbs and rural areas since 2020.
Also, take lifestyle into consideration. For instance, areas close to downtown are more desirable for renters. However, when a recession rolls around, residents might wind up changing their location sentiments. Stay on top of the trends so you before investing you’ll know if people desire urban, suburban, or rural residences.
Cash Flow
Another rule to help you make the best real estate deals is keeping cash flow top of mind. For example, suppose you’re looking to include a rental property in your portfolio during a recession. In that case, check out properties with excellent cash flow. These are properties with cash still coming in after removing expenses and mortgage payments. Such rental properties will help minimize your risk of even during a recession.
Factors That Make Real Estate a Great Investment
There are three principal factors that can make real estate a good buy if you’re looking for an alternative to the market in a recession:
Low correlation to stocks – Historically, real estate has a low correlation to the stock market. So even if stocks are experiencing increased volatility because of a recession, there’s not much carryover to the real estate market.
People still need housing – Even when the economy is in a recession, people still need a place to live. When the need for rental properties remains steady or even rises during a recession and there’s a limited supply of housing, real estate investors are well positioned to derive a steady flow of rental income.
Recessions create bargains –Â If a recession causes a hot housing market to cool off, that can create opportunities for investors to purchase investment properties at a discount. Real estate can also act as a hedge against because real estate prices tend to keep pace with rising consumer prices, making them a more inflation-proof investment.
In Summary
A recession is marked by a shrinking economy. People spend less of their income on discretionary purchases, focusing instead on essentials. To shore up their bottom lines, companies may slow down hiring or lay off workers. Stock prices may drop in the face of uncertainty about the economy. However, investing in real estate can provide a measure of stability for investors when the economy slows.
Part of our mission at Black Girls Buy Houses is to connect and coordinate real estate investors with stable, passive income generating opportunities by providing discounted, off market properties – from single family houses up to apartment buildings. If you’re looking to invest is real estate to create wealth and passive income, we should talk. Feel free to use this link to schedule a time for us to meet and review investing options!