Risk adjusted returns during a recession

Blog March 2024

Why multi-family residential properties provide better returns

Time in the market beats timing the market, Ken Fisher says. And he’s spot on – experience is the key factor in real estate. Our own experience in the market has shown us that the best way of investing for a recession is through buying multi-family residential properties.

What is a Recession?

recession is a period of time when the economy is shrinking. This can happen for a number of reasons – people having less money to spend, businesses and governments having less to invest or spend. These factors can lead to a rise in unemployment and have a stagnating effect on the economy. A major effect that a recession can have on the real estate market is a decrease in purchases of residential properties. This is a negative effect for investors who rely solely on fix and flip strategies, but it’s different for those who are willing to invest in multi-family real estate. In many ways, multi-family properties are a recession-proof class of real estate assets. So, let’s sort out what is unique about multi-family housing that makes it immune to the effects of a recession.

What makes multi-family recession-proof ?

Real estate investing overall brings major revenues, especially when conducted by an experienced investor. But there are a few key aspects that render multi-family residential properties particularly unique – they are a form of recession-proof real estate in many ways. What makes multi-family real estate recession-proof? It’s a consequence of higher inflation which results in a higher cost of borrowing. This means that it becomes more expensive for people to borrow money, driving up the rental cost. And as the cost of borrowing increases, many find themselves unable or unwilling to take out loans for large purchases, such as buying a single-family residential property. They instead opt for rental arrangements. In the end, this builds a growing demand for rental properties, resulting in a great opportunity for investors.

The increased demand for rentals during a recession shows that buying multi-family residential properties in advance of a recession can serve as an advantage for the investor. People still need living spaces, regardless of their financial standing, making apartments essential human needs. Even if people’s budgets won’t allow for buying a house, there will always be demand for rentals, which makes them recession-proof and reliable in tough economic conditions. And real estate investors can capitalize on this fact by buying multi-family residential properties and making them rentable so they may have income during a crisis.

Another important contributing factor to the utility of buying multi-family residential properties for a recession is that multi-families are a more stable investment than many other assets. When the economy is struggling, the housing market tends to suffer. However, multi-family residential properties are less likely to experience as much volatility as other types of real estate, making such a house or property recession-proof in many ways. This means buying multi-family residential properties is a significantly safer investment than other types of assets in case a downturn hits the economy. So, during a crisis, many people’s inability to buy residential properties combined with the necessity of a roof over one’s head gives multi-families the edge, which is what makes such a property recession-proof.

Investing for a recession

Investing for a recession means simply investing in properties that will allow you to endure an economic crisis. Investing in such properties will allow you to achieve more risk-adjusted returns during a recession, which makes for a very important consideration to any investor. To address this consideration, investors need to decide on a few key aspects, the most fundamental question to ask here is which type of property is the wisest choice. We suggest opting for buying multi-family residential properties to counter a crisis, and here’s why.

Buying multi-family properties vs. other types of real estate during a recession

Investing for a recession as a real estate investor comes down to choosing cash-flow properties, which are essentially rental properties with the capacity of generating a steady stream of income. And, as we’ve already discussed, buying multi-family residential properties is the best example of such a property. Unlike more commercial types of properties, multi-families are far more durable in times of crisis and can weather out the storm. Big businesses can take the biggest hits during a recession – if people have less money to spend, they are less likely to shop unnecessarily, so malls, restaurants, and other entertainment venues can easily close down. Office spaces carry an increased risk as well due to the possibility of the business going bankrupt in a crisis, as we saw during the Covid lockdowns in many markets. But a rentable living space can provide a steady income in a crisis.

Another major type of property to invest in is a single-family residential. But investing for a recession requires a steady cash-flow, and a single-family residential provides less stability in terms of rental income. Single-family properties also provide for decreased rentability simply because of their size. Multi-families, on the other hand, have the capacity to house multiple tenants at once – as many as the number of units allow. This can result in higher rental income for investors, which can help offset any losses from decreased property values, making multi-families a form of recession-proof real estate. The risks are adjusted – if a single tenant leaves the building, only a percentage of the total revenue from this asset is lost.

Investing for a recession: Which US cities should you choose?

When it comes to choosing the best states or areas in the United States in the context of investing for a recession, you want to look out for a few key factors:

  • Growth in the business sector 
  • Cultural significance & attractiveness
  • The state’s economic condition 

Based on these factors, you can parse out the states best suited for your needs. But the area we believe in strongly as a recession-proof real estate investment is New York – both the city and its surrounding areas. New York is a prime example of a culturally important location that is also in good economic condition and has a growing business sector. The areas surrounding New York are great for multi-family investments overall because of their proximity to the ever-growing city combined with increased comfort and a more peaceful environment. And they’re especially great for investors searching for resilient investment opportunities due to the ample space for multi-family development.

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Any questions

What is affordable housing?

Affordable housing refers to housing units designed to be accessible to low- and moderate-income families, typically costing no more than 30% of their gross income.

The definition of “affordable” typically varies depending on location and income levels but generally encompasses rent or purchase prices that don’t exceed a certain percentage of a household’s income.

What is Section 8 housing in the US?

Section 8 is a federal rental assistance program in the US run by the Department of Housing and Urban Development (HUD) that helps low-income families and individuals afford decent and safe housing in the private market. 

The program provides eligible households housing choice vouchers that cover a portion of the rent directly to the landlord, with the tenant paying the remaining amount. Property owners who participate in Section 8 agree to rent units to qualified individuals and families at a rate approved by the program.

How can I invest in Section 8 housing?

There are several ways to invest in Section 8 housing:

  1. Direct ownership: You can purchase a property approved for Section 8 and rent it to a qualified tenant using a voucher and receive rent subsidized by the government.
  2. Real estate investment trusts (REITs): REITs pool investor funds to purchase and manage income-producing real estate, including affordable housing.
  3. Limited partnerships: Limited Liability Companies (LLCs) offer another option for investors to pool resources and invest in affordable housing projects.
What is the difference between multi-family and single-family properties?

Single-family property: This refers to a standalone house or unit designed for and rented to one household.

Multi-family property: This refers to a property containing multiple dwelling units, such as a duplex, apartment building, or condominium complex. Multi-family properties offer the potential for higher rental income but typically require different management strategies and considerations compared to single-family homes.

What is the difference between buying and flipping houses?

Buying and holding: This involves purchasing a property to keep it as a long-term investment, generating rental income and potentially appreciating in value over time.

Flipping: This involves buying a property, renovating it to increase its value, and then selling it quickly for a profit. This is a more hands-on strategy with higher risks and rewards compared to buying and holding.

How much do I need to start investing in affordable housing real estate?

The minimum investment required varies depending on the chosen method. Direct ownership typically requires a higher initial investment for the property purchase, and renovation up to Section 8 standards, while other options like REITs might have lower minimum investment amounts.

Do I need to be a US citizen to invest and own the property?

No, US citizenship is not a mandatory requirement for investing in affordable housing in the US. However, specific restrictions or regulations might apply depending on the investment method and your residency status.

It’s crucial to consult with a professional to understand the legal and tax implications for non-citizens.

Do I need to pay US tax as an overseas investor?

This depends on the type of investment, your residency status, and any applicable tax treaties between your home country and the US.

Consulting with a tax professional specializing in international investments is highly recommended.