A recession could arrive at any time and as soon as 2025. You don’t want to put your retirement or generational wealth on the line and potentially take a devastating hit simply because you were unprepared. In this guide, we’ll provide the keys to a recession-proof real estate investing strategy, including “offensive” and “defensive” moves to make in advance, high-risk investments to avoid, and crucial tips to keep in mind as you navigate a downturn.
Summary:
A recession is an extended period of economic decline. Unlike shorter and less severe “downturns,” recessions can last from several months to a few years. During these times, there is usually reduced consumer spending, creating less demand for businesses’ goods and services. This leads to job layoffs, home foreclosures, and other financial turmoil.
Job layoffs and decreased spending often cools the housing market during a recession, forcing many current and would-be homeowners into renting. Home prices may decline, but it’s worth noting that the 20% decline seen during the Great Recession was a real estate-caused anomaly and not the norm. In the four other recessions that have occurred since 1980, home prices declined by just 2.7% on average.
To encourage spending and get the economy moving again, the Federal Reserve often lowers the federal funds rate. This reduces the cost of borrowing for lenders and typically leads to lower mortgage rates for homebuyers, at which point housing market activity tends to pick up.
Rental demand may increase during a recession. Take advantage with a new turnkey rental!
As a real estate investor, you should be aware of the tenant hardships and extra expenses that can be brought on by a recession. Here are a few “defensive” moves that will help you prepare for the worst:
Cash reserves can be a godsend in a recession, when you may face more issues than usual. Do you have enough money to cover a large capital expenditure? What about a lengthy turnover? Would you have the funds to keep you above water if a tenant suddenly stopped paying? Make sure you have enough liquidity to account for the unexpected!
Carrying large amounts of debt is especially risky in an economic downturn, when your income may be affected. Whether you’ve got credit card balances from renovations or a rental close to being paid off, take steps to minimize your liabilities so that if your revenue drops, you can stay afloat.
A recession isn’t the time to be drastically raising rents on financially compromised tenants. If you’re worried about turnover during an economic downturn, keep rent increases to a minimum, especially if you’ve got long-term, high-quality tenants. Raising rents too high may force them to move out, leaving you with a costly turnover and vacancy.
Buy turnkey rentals with property management AND tenants already in place!
While you may not need it today, a home equity line of credit (HELOC) can come in handy when you need to make new purchases or repairs. You can take out a HELOC on your primary residence or rental property, and you won’t have any debt until you start using it. So, there’s no reason to wait till you’re desperate for funds—open a HELOC now so it’s ready to use if circumstances call for it.
Although you should be more cautious with your spending and investing during a recession, taking advantage of market conditions can bolster your portfolio. Here are some of the “offensive” moves to make:
Economic hardships may mean more housing inventory, fewer buyers, and better deals, so don’t stop browsing the market. With less competition, you have more leverage and negotiating power than you think!
Some assets, like commercial real estate, have been falling in price, making now potentially a great time to pick up properties at a discount. Other assets, like new build investments, are seeing price reductions from builders AND interest rate buydowns. During tough times, it’s hard to move inventory, which incentivizes builders to give you a better deal!
Always run the numbers before you buy. Try our rental property calculator!
Take advantage of 5% down financing on new build rentals with LOW rates!
If you’re all in stocks or index funds and are feeling worried due to market fluctuations, it may be a sign to diversify. Having different assets in your portfolio can help keep you stable during downturns and different economic cycles. Whether you’re new to real estate investing or looking to diversify your real estate portfolio further, turnkey rentals are a phenomenal investing option!
While there are several recession-proof real estate investments that could pay off in the long run, there are just as many real estate investing risks that could sink your portfolio.
Keep in mind that the tips below are not investing advice, merely our own opinions on asset volatility.
Buying the cheapest home you can afford is NOT a good move in any market and especially during a recession. These properties typically require more frequent (and more expensive) repairs, which could quickly eat away your entire reserve account.
Maxing out your lendability to buy a commercial warehouse may not be the best decision when businesses are struggling. If you’re going to delve into a new asset class, partner with those who have expertise in it and use their guidance to build your own knowledge.
Need expert guidance on real estate investing? Join Rent to Retirement Academy!
Whether it’s crypto or a risky real estate syndication, don’t buy into the “get rich quick” mentality; those who build wealth quickly also watch it fall quickly. Instead, build a diversified portfolio of real estate with lasting demand—one that can keep your wealth stable during downtimes and growing during good times.
For every investing success story, there’s an investor whose rash or unwise decisions caused them to lose money or, in some cases, everything during a recession.
Some overleverage, meaning they take on way too much debt than they can reasonably repay, which becomes extra risky when there’s a loss of income. Others don’t have adequate reserves to account for unforeseen repairs, nonpaying tenants, or vacancies. Some fail to analyze properties correctly and buy bad investments that bleed money or go upside down.
Don’t wait for a recession to affect you. Take steps now to not only protect what you’ve already built but also strengthen your financial position tomorrow.
When you buy turnkey, you’re buying a property that is properly priced. What’s more, these rentals are newly built or renovated, have paying tenants already in place, and are professionally managed for you. This means lower maintenance costs, less turnover risk, more cash flow, and fewer headaches!
Real estate investing in a recession can be a savvy move for those who have the financial means. Just be sure not to overleverage yourself or buy “cheap” or risky assets that could impact your portfolio negatively.
The best real estate investments perform in and out of recessions. Rentals, especially turnkey properties that have happy tenants and are professionally managed, often perform well due to increased rental demand.
How to Make Money in Real Estate During a Recession?
The best way to make money in real estate during a recession is to buy a great property at a price dip, hold it for the long haul, and allow its value to appreciate as the economy recovers and the housing market grows. If you already have stable real estate investments, make sure you hold on to them!