The economy consistently goes through cycles, and one of those is, unfortunately, a recession. Although recessions can be challenging for some, they can also create opportunities for savvy real estate investors. The trick is always in the timing, but if you plan it right, you can turn a profit with the right investments.
Certain types of properties fare better in a housing market recession. If possible, diversify into multiple asset classes to reduce risk.
Look for 1-4 unit properties that would be suitable for rental so you can generate consistent monthly income. Unless you have cash on hand or are willing to take on additional debt during a recession, properties that need minimal improvements and have long-standing tenants tend to have less risk. However, buying a discount fixer-upper and turning it into a rental is almost always good. The extra built-in equity can help you weather a recession.
If you are a flipper and have projects in the works, consider holding onto them and converting them to rentals instead. You might not be able to sell or make your target profit during a recession, so be flexible and switch gears to a buy and hold strategy if you need to. If you are flipping, the flip needs to happen quickly and cater to high-demand areas during a recession or entry-level properties, depending on local demographics.
Look for commercial properties in industries that tend to be more resilient, such as healthcare, childcare, multifamily rentals, e-commerce, and accounting. As with residential rentals, the ideal properties are those that need few upgrades and already have long-term tenants.
For short-term investments, location is also important. Recessions generally have less effect on high-income neighborhoods, so focus your efforts there.
When it comes to investing during a downturn, there are two scenarios to be on the lookout for: a looming economic contraction and the trough.
Watch for signs of an economic contraction, including slower growth, higher unemployment, and less spending. This is a good time to look for distressed properties, but be mindful of overextending because you’ll need to service your debt during the recession.
The trough is the best time to invest because prices are as low as they will get. However, it’s impossible to predict the timing of this perfect financial moment. Do your best not to sell during this time because brighter days are ahead. You might need to be satisfied with just breaking even on your investments, so plan for this scenario.
Keep an eye on money markets. The more liquid the asset, the faster they react to fiscal policy changes. Real estate always lags by at least 2-3 months. Also keep an eye on stocks and treasuries because these can also be indicators.
Like any type of investing, there are pros and cons to getting into the real estate game. Understanding these before you jump in is one of the keys to success.
Foreclosures often increase during a recession, giving investors the opportunity to purchase property at a lower price. There may also be more room for negotiation because sellers tend to be more motivated to sell, especially if a property has been on the market for a long time.
There are fewer individual buyers during a recession, which means less competition. However, you still need to present a compelling offer, and being able to close fast will always give you an edge. One of the biggest advantages is that buying at a lower price sets you up for future profits. Although there are no guarantees, real estate is historically a good investment.
In times of economic uncertainty, depending on how you generate income, taking on additional debt to invest in real estate could have higher risk during a recession. Weigh all of the factors carefully. Unfortunately, it’s often harder to get a loan from a conventional lender during a recession because of tighter lending rules. Fortunately, hard money lenders are always an option.
Although there may be fewer individual buyers, other savvy investors are taking the same approach as you are, so there may be more competition in this area, including from larger corporations. One of the biggest challenges when aiming to invest near the trough is that it may be difficult to catch a falling knife. Values may go down further, so you need to stay liquid and have contingencies planned in the event this happens. Real estate is not as liquid as stocks, so you’ll have to be tied down longer than other investments.
When traditional lenders tighten their purse strings, hard money is a safe alternative that will allow you to make smart real estate investments. Even if you are able to get a loan from a conventional bank, you may want to consider the benefits that hard money offers: speed to close, flexible lending terms, and the ability to invest in properties that banks won’t touch.
If you would like to learn more about real estate investing and how the current market might influence your decisions, read The Ultimate Guide to Navigating the Real Estate Market in Any Economic Season.