Updated: Oct 29
The game of winning or losing in investing is primarily determined by economics. In fact, we can never be certain of the economy's future course. However, depending on the caliber of your choices, you can hedge your bets for better or worse.
Investments typically lose money when an economic downturn occurs, such as the one we may be experiencing right now. GDP growth in the first quarter was 1.4% lower than anticipated. If that pattern continues until the end of Q2 and we record a further quarter of GDP contraction, we are by definition in a recession.
So how should you as investors be getting ready? Invest in property.
Over the past 60 years, despite many recessions, real estate values have kept rising. They have occasionally gone up during the actual recession.
Credit: St. Louis FRED
Investors made significant gains on real estate stocks in especially during the Great Depression.
What does this entail for you as a landlord and why is this the case? Once more, how can you profit from purchasing investment properties?
Let's discuss it.
Why Is Investing in Real Estate Attractive Even in Hard Times?
When the economy is in freefall, real estate is among the most reliable assets. In a volatile market, rental housing typically acts as a natural hedge. This is primarily due to the fact that homeownership rates decline during recessions and other economic downturns.
Property owners consequently start living in rental units, which raises the demand for them under such circumstances. There may be a small window of opportunity where you can buy properties at a reduced price if the economic slump is accompanied by an early decrease in real estate market values, which is frequently the case.
You may make informed decisions, purchase a home with a positive cash flow, and turn a profit during a recession by following the real estate principles we've all learned and ignoring emotions.
Three good reasons to invest in real estate during a recession
1. A fundamental requirement is always housing.
People lose their jobs, income, and sometimes their homes when an economic crisis occurs. Finding renters during these times can be relatively simple. A basic requirement that is always in demand is housing. We may postpone getting a new phone or car, but choosing to live on the streets out of choice is uncommon.
If you don't ignore your rental property, you won't have any significant difficulties finding tenants. To get the most out of your investment property, it's important to maintain your properties well and acquire a house in a desirable area.
2. Comfort during recessions is provided by residential real estate rather than business real estate.
It's possible that you believe commercial real estate to be more reliable than residential real estate. After all, some businesses have persevered through numerous economic downturns since the 18th century, demonstrating that they have the experience necessary to survive.
But if anything, COVID-19 taught us that commercial real estate isn't often as simple as it sounds. Old and new firms alike shut down, whether due to economics or coercion. We are in an intriguing position and need to take into account the current external challenges to commercial real estate, including supply chain concerns and the growing cost of gas.
Residential residences, on the other hand, are not impacted by local or worldwide corporate economics. No matter what is going on in the world, people still need a place to live.
3. Real estate is frequently more reliable.
Investors in residential real estate didn't suffer as great losses as stock market investors did as a result of the Great Depression and the dot-com boom. At the end of the Great Recession, single-family rental assets actually had positive values as a sector.
Residential real estate investments on a smaller scale don't participate in daily trading like equities do. As a result, they offer steadiness when stock prices are erratic.
Purchasing investment properties as a landlord is unquestionably an exciting and worthwhile endeavour with numerous financial advantages. Here are some suggestions to assist you make a wise house purchase and make the most of your investment properties in the long term before you sign that check.
Recommendations for Buying Investment Properties
The two guidelines listed below can help you get the most out of your real estate investment.
Think about the setting
Consider the cash flow
1. Think about the setting
Get the whole picture when deciding which rental properties to purchase amid a downturn in the economy. It's critical to keep in mind that purchasing the land, not the house, is the main objective. So, look for regions with potential for job growth as well as stable work.
The labour market may sabotage your goals for rental income. If a tenant has been laid off and is having trouble finding work, they might not be able to pay their rent or move to a different location.
Additionally, think about your lifestyle. For instance, tenants prefer to live in neighborhoods close to the city center. However, when an economic crisis strikes, locals may come to have different opinions on their neighborhoods. Keep an eye on the trends. Are individuals on the lookout for urban residences? Rural or urban?
Due to the growth of remote work and a need for additional space, we observed a substantial migration towards the suburbs and rural areas in 2020. When the next recession hits, will this change?
2. Consider cash flow
Maintaining cash flow as your primary concern is another guideline to assist you make the greatest real estate deals. Consider the situation when you want to add a rental property to your portfolio during a recession. If so, look into homes with strong cash flow. These are homes that still generate income after expenses and mortgage payments are subtracted.
The risk of even a recession will be reduced by such rental buildings.
To sum up / Conclusion
Nobody likes to struggle during a recession. It disrupts our money and has the potential to drastically alter our life. However, if you own rental property, this does not have to be your tale. Instead, a recession may put you in a position from which you may profit from the situation.
Always keep in mind that you have the power to change the odds in your favour, regardless of the state of the economy, by making smart decisions when investing in the rental property market.
Multifamily space is becoming competitive, so start your homework as soon as you can. Learn more about multifamily investments here.
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