Recessions can be detrimental to many businesses, but real estate investment is unique in its resistance to economic downturns. It’s one of the most recession-proof assets in the business, good for passive income, and one of the best assets to own in a recession.
What is a Recession?
Before we dive into the nuances of investing during economic downturns, we first need to understand what exactly we are talking about. So, what is a recession? It’s the temporary decline of the economy strictly defined as the negative GDP growth over 2 consecutive quarters. Such periods depress prices in markets, cause rises in unemployment and interest rates, as well as a drastic drop in demand for goods and services. Of course, an economic decline such as this can and does cause great distress for businesses and investors of all fields. However, one particular aspect of real estate investing sets it apart and makes it recession-proof.
Properties are among the most useful assets and are unlikely to lose value in the long run. And so regardless of how much prices depress, they are highly likely to surge again. This is what makes real estate investing recession-proof, this is where the opportunity for investors lies – this period of dropping prices and panicked owners. Some investors or property owners, whether due to genuine issues or sheer inexperience, will be in a rush to sell their properties as prices go down. An example of a very real problem could be the slowing of cash flow. Once cash flow falls to a point where it’s not enough to cover the debt, any investor will be forced to sell.
This will present a great opportunity for others. A sufficiently funded investor who approaches the potential seller, offering a guaranteed and quick close will have strong negotiating leverage. And the seller will most likely agree to a reasonable bargain because of the pressing need to get out of the property. For real estate investors, opportunities like these are ripe soil for profitable acquisition – a chance to gain an edge. And after all, what is a recession but an opportunity for us to capitalize on?
How to capitalize by investing in real estate
Now, let’s dive into the details and see exactly how we can bank on downturns as investors. Real estate investing is among the most recession-proof assets in the market as it is, but we can take it even further – ensure post-recession profits, a long-term supply of passive income, and future prospects for our investment business. Here are the most important measures and precautions that can be taken in order to secure investments.
1. Cash is king
We all know the age-old adage that cash is king, it’s truer than ever in times of a downturn. The best way to actively buy real estate in a recession is to have extra funds in the form of cash. This will enable you to be proactive in your purchasing decisions and allow you to capitalize on the economic situation. As we’ve established, prices drop during a crisis so buying real estate in a recession can give us an edge. To bank on this, investors need free cash ready to be deployed.
2. Create Opportunities
Properties may be some of the most recession-proof assets, but the best buying opportunities need to be discovered first. Recession-proof real estate investing requires some forethought – consider all options and take action. For example, you can take the first step and send out offers to the owners of properties you’d like to purchase. Aim for properties that seem to be less tended to – this can be a very useful marker that the owner’s passive income has slowed significantly.
Another thing that could be immensely helpful is networking. Establishing relationships with both other investors and lenders will help in finding good deals. Lenders, in particular, can be very helpful connections as banks don’t want to hold onto foreclosed properties – they want to get rid of them. So, lenders who know of your readiness to deploy cash will be very willing to let you know of any foreclosed properties. On that note, you will also want to monitor foreclosures and bankruptcies in order to be aware of such opportunities.
3. Patience is Key
Economic downturns can last for a while and it’s important to factor that in. As recession-proof as real estate investing is, the advantage it gives you may take some time to show. Downturns can last from a few months to a few years, and you need to be prepared for all of it. When you plan the management of your assets, consider the possibility that the downturn will last for a while – factor in high vacancy rates and low passive income. Be prepared for the worst-case scenario and have extra capital to help you come out of the recession.
Is Real Estate recession-proof?
Many people looking into real estate often wonder: is real estate a good investment in a recession? Is real estate recession-proof as an asset class? As you may have already discerned from this article, the answer to both questions is affirmative. But as we also addressed, this doesn’t mean that it’s entirely fireproof. Some real estate assets are better in this regard and more recession-proof than others. There are 2 major types of properties you can invest in – commercial and residential. We often refer to residentials as a property that can house, at most 2 or 3 families. Commercials, on the other hand, can either be a space for businesses or multifamily residentials. And while due to their inherent nature, properties in general are quite resistant to economic crises, some of them are even more resilient than others. To shed more light on this, let’s take a deeper look at these 2 types of investments.
The best assets to own in a recession
The best real estate assets to buy and own in a recession are multifamily residential properties. As we’ve established, buying during a crisis is beneficial due to the low prices. But owning a rental property during a recession can also be a helpful way to ensure your investment ventures are recession-proof as a whole because it will give you some stable form of passive income. A passive income can be of immense utility to any investor when the on-hand cash depletes, which is bound to happen if the crisis lasts too long. So, when it comes to the best assets to own or buy in a recession, multifamilies are the winners. Most profit in multifamily real estate investing is made on the buy, so the lower you buy, the higher your return will be.
Moreover, owning a rental property during a recession can make a world of a difference as all available capital matters, which makes it an incredibly worthwhile investment.
