Recessions are temporary. However, learning to make a real estate investment portfolio thrive under any circumstances offers an edge in the market. Even if the industry takes a nosedive, those who know how to diversify and do market research come out on top. Here are seven ways to survive an economic downturn and unforeseen housing impacts.
1. Diversify Property Types
A study of single-family real estate investors found 53% expected growth in 2024. Although interest rates are slightly higher, there is more inventory, and available rental properties may be easier to secure.
What does this mean for real estate investors? They can more easily diversify their properties by taking on multi-tenant buildings, single-family homes and commercial avenues.
Storage units may also be a popular choice for those wanting to expand their leasing options without the headaches of maintaining a living space. Storage facilities tend to be more recession-proof than other investment properties.
2. Build Positive Cash Flow
It’s easy to get overleveraged and have more money going out than coming in, so looking for highly desired properties is crucial.
High liquidity means owners can sell a property easily and quickly without losing money. Regardless of the property type, looking for favorable market conditions is best. For example, buyers should concentrate on homes in neighborhoods known for their location or schools. Smaller units may appeal to first-time homebuyers.
Additionally, people should consider short-term cash opportunities, such as rentals with shorter leases. This is like hotels leasing to businesspeople, traveling nurses or families in transition to new construction.
3. Understand Financing Options
Knowing the regulations around different investment financing options helps ensure investors can afford their buys. Alternative funding strategies to secure building investments can determine success or failure during a recession.
Private financing, investors and leveraging assets already in the portfolio are viable methods of advancing toward goals.
4. Research Stability
Buyers should research the stability of an area before buying a property, including job growth, future potential, and whether properties hold value and have tenant stability.
If purchasing a multi-family unit, potential homebuyers should ask for records of how frequently renters come and go. Investors should seek properties with staying power as advertising, background checks, property preparation and other costs quickly add up. Utility fees, property taxes and ongoing maintenance are other expenses to keep in mind.
The going rate for rent in a particular area can determine if profit potential holds steady over time. Finally, people must be aware of economic indicators when making time-buying decisions. If costs suddenly rise, an investor might pay more for a property than the market bears. As a rule of thumb, buyers should buy low and sell high.
Tenant credit analysis becomes crucial to ensuring cash flow remains steady, particularly during difficult economic times.
5. Watch Local Amenities
Technological and development news might impact an area. For example, if high-speed cable internet enters a neighborhood, it could become more desirable to young working families. Excellent internet service is a critical part of modern living.
Landlords should keep abreast of current news about everything from new factories to rising crime rates. A manufacturing build-up may attract new families to the area and increase rent costs, while closing factories may have the opposite effect.
The more investors know about the location, the better informed their decisions will be. Investors should be careful about overleveraging investments in an area that may prove problematic. Diversification includes types of properties and mixing up locations. If one goes downhill, at least it is only one investment.
6. Refinance for Lower Rates
During recessions, the Federal Reserve might lower interest rates to spur economic growth. Lower rates present an opportunity for investors to refinance properties under higher rates. Getting payments down even a few hundred dollars a month can afford flexibility that allows the person to take on more assets or make more profit off the ones they have.
Some banks charge significant fees for refinancing, so ask questions about how much closing costs and other fees add up. Refinancing might not be worthwhile if it takes too long to recoup costs or the out-of-pocket expenses are high.
7. Invest Without Buying
Another option is to move some financial investments into real estate investment trusts (REITs). When investing in a REIT, the money is financially backed without the added stress of managing and maintaining a property.
Interested parties can choose stocks the same way they’d look at any mutual fund. One must pay attention to fees, terms and movement over time. Is the REIT consistently earning a decent return over five years, 10 years or more? REITs offer specializations in areas like commercial, residential or medical. Investors should choose REITs most likely to increase in value.
Those with REITs in their stock portfolios gain dividends from the success of experienced real estate investment professionals with negligible risk.
Win Some, Lose Some
When it comes to real estate investing, it’s next to impossible to predict the market. Even people who have been in the industry for decades sometimes get it wrong. Instead, buyers must research, make informed decisions, diversify and learn from mistakes. When a recession comes, those who’ve prepared will come out of it with their funds intact. Since real estate is a long-term game, buying properties during a recession keeps a portfolio on an even keel.
