Why Multi-Family Residential Properties Provide Better Risk-Adjusted Returns During a Recession

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?

What is a Recession?

A 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 a Multi-Family Residential Recession-Proof Real Estate?

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.

What is a Recession?

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 Residential 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 Locations to 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 

Recession and Real Estate: Is Real Estate Recession-Proof?

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. If you’d like to become part of a large multi-family development in upstate New York, reach out to us to learn the details of our newest development in the area.