Some thoughts for Investing in Real Estate During a Recession. Some amazing portfolios were built in the last downturn. Most cycles share common characteristics but always vary in length, velocity, duration, and depth.
Warren Buffett has a saying about the stock market and investing in general: “Be fearful when others are greedy and greedy when others are fearful.”
There has been a lot of talk recently indicating that the housing market is headed for another recession. Despite recovering from the recession that occurred nearly a decade ago, continuously rising interest rates and the unpredictability of the stock market seem to point towards an upcoming recession, at some point. Not surprisingly, this is leaving many potential home buyers wary about purchasing real estate in the next few years, anxious from the memory of the economic crash in the late 200s.
As a result, many investors are nervous about making new real estate purchases, until they have more clarity on where the market is heading. While no real estate investment can ever be 100% recession-proof, that doesn’t mean there aren’t smart options to explore.
Understanding How a Recession Works
To better understand how your investments can survive during a recession, it’s important to look at the lifecycle of the housing market.
When a real estate recession hits, there are four main stages: expansion, peak, recession, and recovery. To put it simply, when there is a large demand for housing, the market begins to boom. When local economies are doing well, jobs grow, and investors receive high ROI (return on investment). This is the expansion stage, which leads to the peak – the tip of when the economy is at its best.
However, when credit is too easy to obtain, many people will invest too much, take larger risks, or purchase more than they can afford. This then causes any property that has been overinvested in to decline in value, leading to a bust in the economy, or a recession.
Eventually, as the market levels out, it will return to the recovery stage, where interest rates and investment values begin to balance and start to return to their usual pre-recession prices.
Real Estate to Invest in During a Recession
There are many types of investments to avoid during a recession, specifically single-family homes and vacation homes, which tend to depreciate more rapidly. Instead, investors should focus on multi-family homes.
Multi-family homes aren’t just apartment buildings and complexes though. Duplexes and smaller 3-4 unit builds are also good bets during a recession. The key is to purchase property where rent is in high demand, because no matter what happens to the economy, people will always need a place to live.
It’s important to do market research before purchasing any investment to ensure there’s currently a demand for rental units in the area you’re looking to purchase in.
What to Know About Appreciation in a Recession
In most cases, no matter what type of investment property you own, you’re likely to face depreciation during a recession. If you’re smart about choosing the right property, slight depreciation won’t hurt your investment, though you’ll likely take home less ROI.
In you invest in a multi-family apartment complex, for instance, you may need to lower the rent for the next year or two in order to fill more vacancies, but you’ll still be bringing in cash flow on a consistent basis, which is a real benefit during a recession.
Another option would be to purchase a duplex or triplex and live in one of the units, allowing you to rent out the other two. When done correctly, this can help put more money in your pocket, while also taking care of your mortgage payment, even during a recession.
Of course, not all properties depreciate during a recession. It is possible, though unlikely that your property will appreciate in value. Unfortunately, there’s no strategy or specific location or property type that can promise appreciation. Instead, it’s better to think of depreciation as expected and appreciation as a bonus.
Upsides to Buying During a Recession
The market can become unpredictable during a recession, with desperate sellers overpricing their homes in an attempt to collect any possible profit. However, other properties will list at much more affordable prices than in today’s market.
Just because a property is inexpensive though, doesn’t mean it’s a good investment, especially if it’s a multi-family property. Be sure to do thorough research on the building to determine if it’s a worthwhile purchase. If the area is experiencing population decline, for instance, purchasing apartments in that location during a recession is likely not a wise decision. Underwriting is particularly important at this stage.
It’s also important to consider the amount of land the property is on, as well. If you’re looking at a property on a large lot in a city where most properties sit on small lots, you might have an advantage during the recession. You can add outdoors amenities to help your listing stand apart or always build onto the land to increase your rental units.
Before the recession hits, you’ll also want to have access to funds available, so when you find a good deal, you’re able to jump in and snatch it up before another investor beats you to it.
What You Need To Know About Interest Rates During a Recession
Historically, whenever a recession hits, the FED lowers interest rates, in an effort to persuade people to take out more loans. For investors using financing, this can make it more affordable to purchase property during a recession. Just be aware that these interest rates will rise as the recession starts to dissipate, so obtaining a fixed-rate mortgage will protect your interest rates from jumping up as the economy begins to slowly recover.
Predicting When the Recession Will Happen
It would be great if we had a clear idea on when the recession was going to occur. However, despite expert predictions and pre-recession warnings, the economy is still not quite there yet, making it difficult for many investors to make purchasing decisions.
One way to help keep an eye on the market’s overall health is to monitor foreclosure filings. Generally, as a recession creeps nearer, foreclosure filings increase. Paying attention to foreclosure numbers in your city, state, or across the country is a great way to stay informed and ahead of the market.
Right now, the number of foreclosures in the U.S, are well below pre-recession foreclosure numbers, even though there was a slight increase in foreclosure filings in March of 2019. Keeping wind of these numbers and talking with other investors can help you better predict when the market might be likely to turn.
Although investing during a recession isn’t the most ideal time to purchase property, if you’re smart and stay in tune with your local market, it is possible to find properties that can weather all of the downs of a recession.
Investing in multi-family units in an area with high demand for rental units is always a safer bet than investing in single-family homes during a time when Americans won’t feel inclined to purchase a home. For an even safer option, consider investing in a duplex or triplex, and living in one of the units to save on expenses and a second mortgage.
While appreciation won’t be likely, you can still make a profit during the recession. It’s important to work with a qualified real estate agent or talk to other like-minded investors who can offer experienced advice and insight.
The Southwest Florida Real Estate Investment Association is the leading source of SWFL real estate investing events that provide investment education and networking in southwest Florida. We analyze the housing market and foreclosures and provide information, education and networking events in order to build a network and knowledge base for investors and potential investors. Attend our next meeting and transform your investing strategy.
It is a lot easier than you think to start investing in real estate. Whether you want to be a landlord, flip homes or simply invest in companies that invest in real estate, there are many ways to get a quality return on your original investment. Join SWFL REIA for more helpful tips on breaking into real estate investment!
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The Southwest Florida Real Estate Investment Association is the leading source of SWFL real estate investing events that provide investment education and networking in southwest Florida. We analyze the housing market and foreclosures and provide information, education and networking events in order to build a network and knowledge base for investors and potential investors. Our members include real estate agent, brokers, investors, hedge fund managers, rehabbers, wholesalers and more.
Our SWFL REIA General Meeting is held in Fort Myers where we provide education on hot topics in investing and an opportunity to enjoy the camaraderie of your fellow investors. You’ll get a chance to ask for advice from successful real estate professionals and even make a few deals on your latest projects.
To become a member, anyone can register as an individual, a couple, or a corporation. Being a member opens the doors for endless networking opportunities, advice from members with decades of experience, new ideas from entrepreneurs, camaraderie with those just beginning, and deals and contracts done in the meeting room. For those interested in Cape Coral rental property investment and/or Fort Myers rental property investment, SWFL REIA will be able to provide a network to help launch a successful investment career.
The SWFL REIA is known and respected as a source of current, actionable and useful information about the housing market in the area that we meet.
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One of the premier sources for real estate investing networking and education is the SWFL REIA. In the real estate world, the SWFL REIA is different in that they do not do information product sales. Their meetings are focusing on the best ways of investing in real estate by collaborating with other property investors who are sharing their experiences.
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