Forbes January 25, 2024
Making significant investments during a recession sounds counterintuitive. While there are risks to consider, today’s market creates an opportunity for real estate investors. Real estate provides a tangible asset that can grow in value and is typically more stable than stocks or bonds, giving investors the chance to diversify or expand their portfolios.
I understand why you might want to shy away from real estate when the economy takes a downturn. Perhaps you have wanted to get into real estate investing for years, but with all the recent talk of a possible recession, you are worried about spending the money. Or maybe you want to increase your holdings but fear you will miss out on better prices later. The reality is that a recession can make real estate more attainable.
“But what if the housing market crashes?” you may ask.
It’s true: 2023 was a stark market reset after a pandemic-fueled housing boom; however, our current mortgage rates align with historical averages before the pandemic. What’s more, the mortgage industry is better regulated and less prone to speculation now than it was during the housing crisis.
Real estate is a forward-looking market that can help you build generational wealth. Of course, you need to know the potential advantages and the risks, so here are some things to keep in mind as you consider buying an investment property.
We don’t often think of housing and real estate equity as an asset class like stocks and bonds, but it is. In fact, many people choose to invest in all of these asset classes during their lifetime. Stocks and bonds have relatively low transaction costs, allow you to diversify more easily and leave your cash more liquid than real estate (although the stock market is typically more volatile than the housing market). Meanwhile, real estate is a hedge against inflation and has tax advantages.
Even with inventory levels driving up prices, investing in real estate during a recession could still result in significant long-term returns. If you’re willing to hold on to your investment, you can benefit from the eventual market rebound.
And if you choose to rent your property, many hopeful buyers might need to rent while they wait to purchase or build their next home. Real estate can provide passive income that carries you through the financial lows.
Owning a physical property provides you with a tangible asset you can rent, sell or leverage—especially when housing inventory and vacancy levels are extremely low.
While real estate has many potential benefits, there are also risks associated with investing in it during a recession. During recessions, interest rates usually come down as people tend to shift their money toward safer markets. As a result, we typically see an increase in bonds and a decrease in stocks. However, there is a risk of being over-leveraged if you invest too much money in housing expenses, taxes, etc., which can lead to negative cash flow and low financial liquidity.
While the housing market may still see positive growth during a recession, we also see significant changes in the overall economy, including job and business losses and reductions in consumer spending. As an industry, we know that rents will likely continue to remain strong, but it’s important to consider financial factors if you lose your tenants or your job.
That’s why it’s especially important during a recession to have a solid financial foundation, a high credit score and strong cash flow. If you choose to finance your purchase, be ready to provide evidence of two years’ worth of steady income.
You can make informed investment decisions by doing your due diligence and sensibly assessing your risk exposure with trusted financial, real estate and mortgage professionals.
If you’ve dreamed of becoming a real estate investor, don’t be discouraged by economic volatility or a possible recession. Educate yourself on the market and create a plan with expert advisors. Then you’ll be ready to make an offer when the right deal comes along. Those who continue to invest wisely and responsibly can take advantage of the current real estate market with the chance to come out ahead in the long run.
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