How to Invest in Real Estate During a Recession

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SmartAsset: How to Invest in Real Estate During a Recession

When a recession sets in, the value of your stock portfolio may take a hit if prices drop temporarily. While downturns aren’t necessarily ideal, they can create opportunities for savvy real estate investors. If you’re thinking of getting into real estate investing during a recession or you already own investment property, it’s important to have a strategy for maximizing profits. A financial advisor could guide you in making real estate investment decisions during a recession.

Is Real Estate a Good Investment in a Recession?

A recession is marked by a shrinking economy. People spend less money on discretionary purchases, focusing instead on essentials. Companies may slow down hiring or begin laying off workers to bolster their bottom lines. Stock prices may drop in the face of uncertainty about the economy.

While it’s not exactly a rosy picture, real estate can offer some stability for investors when the economy slows. There are three primary factors that can make real estate a good buy if you’re looking for an alternative to the market in a recession:

  • Low correlation to stocks. Historically, real estate has a low correlation to the stock market. That means that even if stocks are experiencing increased volatility because of a recession, there’s very little carryover to the real estate market.

  • People still need housing. Even when the economy is in a downturn, people still need a place to leave. If demand for rental properties remains steady or even rises during a recession and there’s a limited supply of housing to go around, property investors are better positioned to be able to count on a steady stream of rental income.

  • Recessions create bargains. A recession doesn’t automatically precede a drop in home values. But if a recession causes a hot housing market to cool off, that could open up opportunities for investors to purchase rental properties at a discount.

Real estate can also act as a hedge against inflation in the event that a recession leads to stagflation. Stagflation is marked by high inflation and high unemployment. Real estate prices tend to keep pace with rising consumer prices, making them a more inflation-proof investment.

Best Real Estate Investments for a Recession

If you’re interested in getting started with real estate investing during a recession, the first thing to consider is what types of properties might work best for you. Buying a rental property might be an obvious choice. As long as you’re able to keep tenants, renting out property can generate income through a recession.

There are different types of rental properties you might consider, including:

The more units you’re able to rent out, the more rental income you can generate. But more units can mean higher maintenance costs and more responsibilities overall. You can higher a property manager to oversee your rentals for you but you’ll have to pay them a fee, which can detract from your profits.

If you’re not interested in owning rental property for the long term, you might try flipping real estate instead. Flipping means finding a property, fixing it up, then reselling it for more than what you paid. Flipping properties in a recession can be tricky since the pool of ready homebuyers might shrink.

The longer the home sits on the market, the more you might pay toward the mortgage if you took out a loan to purchase it. But if you’re able to find a qualified buyer relatively quickly, flipping homes could allow you to pocket significant profits if you’re buying homes at rock-bottom prices.

It’s not just residential real estate that can be a good buy during a recession either. Certain types of commercial property, such as warehouse space and farmland, may continue to do well during a downturn. As with housing, people still need basic commodities like wheat and corn products during a recession, which are things farmland investments can be used to produce.

Student housing and senior housing can also be good investments since students still need a place to live while attending school. The aging population in the U.S. means that demand for senior housing isn’t likely to go away any time soon, whether there’s a recession going on or not.

Investing in commercial properties can be attractive since you don’t need to get a loan or buy property. Instead, you could invest in a real estate investment trust (REIT) or through a real estate crowdfunding platform. REITs and real estate crowdfunding can offer the benefits of property ownership without having to actually own it. You can also invest in real estate stocks or exchange-traded funds (ETFs) without having to buy any property

Tips for Real Estate Investing During a Recession

SmartAsset: How to Invest in Real Estate During a Recession

If you’re interested in exploring real estate investments in a recession, here are three helpful tips to keep in mind:

  • Consider location. Location is always an important factor in choosing real estate investments. If you’re looking at rental properties, get to know the area and take the temperature of the overall market. Ideally, you should be looking for rental property investments in areas where demand is high and rental rates would allow you to maintain the kind of profit margin you’re seeking.

  • Weigh cash flow. Cash flow refers to how much money you pocket after deducting expenses from rental incomes. In a recession, it might be necessary to keep a larger amount in cash reserves to cover expenses as they come up, especially if inflation remains high.

  • Compare financing options. If you need to finance an investment property, pay close attention to interest rates and loan options. Rates may start offer higher at the beginning of a recession and then drop as the Federal Reserve adjusts rate policy to encourage spending and borrowing. The timing for when you borrow can make a big difference in the cost of the loan overall.

It’s also important to do your due diligence and research any properties you’re interested in thoroughly. You don’t want to get into the buying process and find out the property has a sizable lien or the area where the property is located is scheduled to be rezoned.

If you’re looking at REITs and real estate crowdfunding instead of rental properties, consider the fees you might pay and the return potential for each one. Also, remember to take the holding period into account. With real estate crowdfunding, for example, your money might be tied up for five to seven years in a single property or handful of properties.

When investing in real estate stocks or ETFs, pay attention to commission trading fees and expense ratios, respectively. Also, consider the overall performance history of a stock or ETF and its risk profile to determine whether it’s a good match for your goals and risk tolerance.

Bottom Line

SmartAsset: How to Invest in Real Estate During a Recession

Investing in real estate during a recession could be a good way to diversify your portfolio. Researching the various options for real estate investing can help you decide which types of investments might be a good fit for your financial plan. If you have cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and healthcare. Stocks that have been paying a dividend for many years can also be a good choice, since they tend to be long established companies that can withstand a downturn.

Investing Tips

  • Consider talking to your financial advisor about whether real estate investing during a recession makes sense for you. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • If you’ll need to get a loan to purchase a rental property, consider what options you have. For example, you might get a conventional loan for a long-term rental but use a bridge loan to purchase a fix-and-flip property. Choosing the right loan is important for maximizing profits and ensuring that you can afford to make the payments if you can’t get a tenant right away or a fixer-upper takes time to sell.

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