
Rising interest rates, high inflation, an inverted yield curve, and supply chain issues suggest the possibility of a recession. While this may sound alarming, it is important to remember that economic ups and downs are normal, and a small downturn does not always lead to a major recession. Most people experience at least one recession in their lifetime, so being prepared is key. Instead of making rushed decisions, take this as an opportunity to review your investments carefully. A potential recession is an ideal time to plan and create a strong, recession-proof portfolio that protects and secures your financial future.
In this blog, we will explore the best tips for recession-proofing your real estate investments and give you our expert recommendations on what to invest in during a recession.
What is a Recession?
A recession is officially defined as a significant economic decline lasting at least two consecutive quarters, marked by a gross domestic product (GDP) drop. This downturn often impacts employment, manufacturing, retail sales, and consumer income.
During a recession, reduced consumer spending on nonessential goods and services slows economic growth, leading businesses to cut back on operations and tighten payrolls. Interestingly, some economists believe recessions may already be underway—or even over, before the National Bureau of Economic Research (NBER) officially declares one.
Real Estate Market During a Recession
The National Bureau of Economic Research (NBER) defines a recession as “a period where there is a significant decline in economic activity spread across the economy and lasts more than a few months.” Recessions have substantial consequences on the housing market and real estate investments. When the economy is not doing well, it might lead to fewer people having enough money to buy houses. Thus, with higher supply and lower demand, properties might stay on the market for long, leading to a fall in their values. Also, if people cannot pay their loans, the rate of mortgage foreclosures and delinquencies might increase due to less money. So, how do you build a real estate portfolio in such testing times? By investing in types of properties that yield profits, no matter the scenario.
Best Investments During Recession
Off-Campus Student Housing
Regardless of a recession, students will continue attending colleges and universities. As a result, they will continue looking for rental properties on and off campus. This is where an investment in off-campus student housing will pay off.
Multifamily Real Estate
One of the best recession investments is a multifamily property, even though the property’s value might not be appreciated during a recession, and the rent might grow at a snail’s pace. The fact remains that even if a few units from the property remain vacant, you will still have a steady flow of income during economic turbulence.
Senior Housing
The United States has a huge aging population. So, senior housing is constantly in demand, thus making it a recession-proof investment.
Farmland
Farmlands are pretty much recession-proof. No matter what the economic situation, food will always remain a necessary staple. Since food is a need, not a want, farmland keeps yielding income all throughout the year.
How to Recession-Proof Your Investment Portfolio
Assess the current market conditions before making changes to recession-proof your portfolio. It is often wise to wait until the economy stabilizes during a recession before adjusting your asset allocation.
You can take proactive steps to safeguard your portfolio regardless of your risk tolerance. With the right strategies, you can confidently protect your investments and navigate economic downturns. These 5 tips will help you build recession-proof investments:
Tip 1: Maximize Your Cash Flow
It is important to have a steady cash flow in an economically unstable environment. This can be done by:
- Increasing the rent
- Allowing pets for an extra fee
- Providing additional services like coin-operated laundry machines
- Getting routine maintenance done in order to avoid future repairs
Tip 2: Factor in Risk and Yield
During a recession, banks generally relax their lending requirements and usually extend credit at extremely low rates. But this could not always work in your favor. A savvy investor will know to consider the risk and yield before opting for a credit. Keeping your debts low is the best way to go.
Tip 3: Reduce Debts
Before investing in a recession, focus more on reducing your debts. Since banks lower the interest rates during such times, seize this opportunity with both hands and pay off as much of your loan as you can.
Tip 4: Diversify
One way to recession-proof your portfolio is to diversify your assets. This can be done by:
- Investing in a Real Estate Investment Trust (REIT)
- Buying Treasury Inflation-Protected Securities (TIPS)
- Participating in a private equity investment fund
- Diversifying across asset classes
Tip 5: Increase Liquidity
As mentioned, reducing your debt is a good way to recession-proof your investments. What goes hand-in-hand with lowering debts is increasing your liquidity. Unlike other investments, you cannot quickly buy or sell real estate properties. So, offloading underperforming assets to improve liquidity is the way ahead during a recession.
Grow Your Investment Portfolio With BFPMInc.
Few investors can predict the dynamic market conditions with any real accuracy. This is where we can help you. The property experts at Beach Front Property Management can help you optimize your income and minimize the risks, even in volatile market and economic conditions. To learn more, you can schedule a 15-minute consultation call with us. We will be happy to help you.
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