3 Reasons For Making Real Estate Investments During A Recession

With it being sturdy and reliable, people have always considered properties, residential as well as commercial, to be the most viable investment option. However, during unprecedented events, such as a recession, many often wonder whether a real estate investment can weather the storm. “Should I invest in real estate during a recession?” is a question we get asked often. Just like any other industry, the property market has understandably taken considerable hits during previous economic downturns. But that’s more than the reason for owning rental property during a recession.  

If you’re considering entering the real estate market during a recession or already own investment properties, having a strategy to maximize profits is essential. A financial advisor can provide valuable guidance in making informed real estate investment decisions during such times. 

What is a Recession? 

A recession is a significant and prolonged decline in economic activity. Typically, it’s defined as two consecutive quarters of negative GDP growth, but economists also use more complex methods to identify recessions. The National Bureau of Economic Research (NBER) considers factors like nonfarm payrolls, industrial production, and retail sales to assess recessions. There’s no fixed rule on which factors are decisive or how they’re weighted in their analysis. 

To qualify as a recession by NBER’s standards, the downturn must be deep, widespread, and enduring. Sometimes, these characteristics only become clear after the recession has begun, leading to retroactive identification of many recessions. 

What Happens to Real Estate during a Recession? 

When interest rates rise, the cost of financing a home increases, but home prices may decline.  

Decreased demand and fewer buyers typically mean less competition for the available homes. When competition decreases, sellers lose the advantage they had in a strong sellers’ market as observed in recent years. In this scenario, sellers might have to accept less than their initial asking price, or at least less than they would in a more competitive market. While this is challenging for sellers, it can be advantageous for hopeful homebuyers. 

3 Reasons for Making Real Estate Investments During a Recession 

Investing in real estate during a recession can be strategically advantageous for several compelling reasons, as listed below: 

Reason 1: Real Estate Continues to Appreciate in Value 

Over the last 70 years, despite several recessions, real estate values have continued to go up. In fact, there have been instances where the values have increased even during the recession itself. But even if economic turmoil causes a hot housing market to cool down, that’s still great news for investors since this could potentially open up opportunities to purchase properties at discounted rates. 

Reason 2: Housing is a Basic Necessity 

The best investment during a recession is residential properties. There’s surely someone on the lookout for a home, and since it is a basic need, housing always has a demand no matter what happens. You might be under the impression that commercial real estate is more dependable and profitable. But, since people need shelter over their heads, homes aren’t subject to global economic conditions and thus make for good investments. 

Reason 3: Real Estate is More Stable Compared to Other Investments 

Compared to other investments such as stocks, Government bonds, Certificates of Deposit, Mutual Funds, etc., real estate is more stable in the long run. According to business and capital news giant Bloomberg, stocks are unstable in nature and can easily be affected by economic crises. On the other hand, a recession has minimal effects on real estate. And since real estate is a physical, tangible investment, you can put it to use even if its value decreases. 

What to Invest in During a Recession 

Wondering which types of properties to buy during a recession? As mentioned earlier, residential real estate is the best way to go. Businesses might suffer losses and you might have to face vacancies in your commercial investments. Housing, on the other hand, will always be in demand. So, if you are wondering how to make money during the recession, start investing in the following property types! 

• Duplexes, triplexes and quadplexes 
• Multifamily homes 
• Off-campus student housing 
• Senior housing 
• Farmland

When you rent out more units, you generate more rental income, but you also face higher maintenance costs and more responsibilities. You can hire a property manager to ease the burden, though their fees will reduce your profits. 

If long-term rental ownership isn’t your preference, consider flipping properties. This involves buying, renovating, and selling for a profit. While flipping during a recession presents challenges due to a smaller pool of homebuyers, it also offers unique opportunities. Quick sales at low purchase prices can result in significant profits, especially when properties are attractively priced. 

Investing in commercial properties like warehouses and farmland during recessions can be highly rewarding, as farmland produces essential commodities. Student and senior housing maintain steady demand, even in economic downturns. You can also explore indirect ownership through REITs, crowdfunding platforms, real estate stocks, and ETFs, all offering attractive investment opportunities. 

You can click here to read about the above-mentioned properties and how they survive during a recession. 

Is It Good to Buy a House During a Recession? 

Buying a house during a recession can be a good decision for several reasons, although it comes with some risks. Let’s look at some of the major upsides and disadvantages of buying during a recession: 

Pros 

1. Reduced Competition: During a recession, many individuals face financial challenges that may deter them from entering the housing market. As a result, there is reduced competition among potential buyers who are still financially capable, offering them greater opportunities in the market. 
2. More Affordable Prices: With fewer prospective buyers able to afford homes, sellers are less likely to encounter multiple offers or bidding wars. This situation often leads to more reasonable home prices that may be advantageous for buyers. 
3. Favorable Interest Rates: During a recession, the Federal Reserve often decreases interest rates to stimulate economic activity. This can translate into lower mortgage rates for borrowers, making homeownership more affordable and attractive during these times. 

Cons 

1. Enhanced Lending Standards: During a recession, lenders may strengthen mortgage requirements to safeguard their operations, ensuring borrowers can comfortably meet their loan obligations. 
2. Focused Seller Market: In a less competitive environment with reduced prices, some sellers may temporarily withdraw their homes from the market or choose to wait, resulting in a streamlined selection of properties for buyers. 
3. Navigating Economic Dynamics: Economic fluctuations during recessions, including potential job losses and financial uncertainties, underscore the importance of liquidity. Opting for investments that maintain liquidity during such times may be prudent, ensuring financial flexibility amidst economic shifts. 

How to Make Money in Real Estate During a Recession 

Considering the ever-present demand for real estate, you have better chances of securing your future through smart investments, proper financial planning, and robust property management. 

BFPM can help you get started on your real estate investment journey during a recession. We not only help you to buy real estate, but our property management services also include multifamily property management, commercial property management, construction management and repositioning, utility management, and cost reimbursement, to name just a few. To know more, you can schedule a 15-minute consultation call with us.