Recent information about the current state of the economy has led to plenty of media speculation of a recession in the US. However, the official consensus indicates it is still too early to tell.
Inevitably, however, the economy will enter a recession at some point, as busts always follow economic booms.
The fluctuating stock market that frequently follows a recession poses great difficulty for many investors. Therefore, knowing how to manage the market on the road before and during a recession is a necessary skill.
In most cases, the entire real estate market changes when a recession approaches.
Real estate prices decline as the market shifts from favoring sellers to buyers. It becomes more difficult to borrow money, making it difficult for people to buy and sell property and difficult for real estate sponsors to recap existing projects.
Because of this, many investors find it harder to make money. However, you can survive a downturn in the economy by altering your investment strategy. You will need to take advantage of certain features of a recession while avoiding others. Even during dark economic circumstances, real estate professionals have been able to expand and scale their businesses using this tactic.
How to Survive a Recession as a Real Estate Investor
There are a few key strategies that will allow a savvy real estate investor to work during a recession. When used properly, these strategies can become a key part of an investor’s approach.
It is essential to maintain a stable cash flow to survive an economic recession.
Increasing the rates for your rental property is one of the simplest ways to achieve this. This ensures that you have more money coming in than going out.
Another method is to come up with additional ways to boost your income, such as offering new services, such as laundry facilities, parking, car wash, or concierge services.
It is important to maintain liquidity during a recession. Unlike stocks and commodities, real estate transactions cannot usually be completed fast. Still, selling off underperforming assets can help boost liquidity. If your real estate portfolio allows for some liquidity, like most assets traded on the SecondRE Marketplace, you can check for willing buyers that would buy your assets for an agreed price.
Money that is easily accessible during a recession will last a long time, even when real estate prices fall and lending standards tighten.
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A recession also presents a few opportunities. For example, banks will relax their lending restrictions and slash interest rates before a recession. It is wise to take advantage of these lower interest rates and pay off your loan obligations as much as you can.
By doing this, you can increase cash flow and build up enough equity to withstand a drop in value.
Furthermore, you can treat paid-down debt as something akin to an investment. If all other factors are equal, paying off a debt with a 15% interest rate is equivalent to earning 15% on your money. Therefore, paying down debt can lead to a much better monetary position in the future.
Most cash alternatives offer little to no interest. For example, money market mutual funds, a common cash alternative to brokerage accounts, yielded 1.71% interest in 2022. Even so, this small amount of interest is a better option than a 20% to 30% stock market loss. In a bear market, taking funds out of your retirement account will give your riskier investments time to recover.
Primary markets, including Boston, San Francisco, and New York, represent the nation’s economic leaders. These types of markets grow at a slower but steadier pace than secondary markets, allowing you to maximize your long-term gains during a period of uncertainty. Real estate typically has a higher value in primary markets like these than in secondary markets like Las Vegas or Phoenix.
Multifamily residences, commonly referred to as apartment complexes, are structures with many rental units. Due to the constant demand for housing, this kind of commercial real estate usually outperforms other asset classes.
Multifamily property value rates may not increase during a recession, and rent increases may be moderate, but generally speaking, this asset class performs well also during a recession. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) buys and owns real estate properties that produce revenue. These properties include commercial real estate, e.g., shopping centers, office buildings, warehouses, self-storage facilities, and hotels.
You can invest in equities in a REIT and receive quarterly or yearly dividends. This is a reliable source of income.
Buying the correct REITs puts you in a strong position to endure an economic crisis. REITs are better positioned to withstand recessions by diversifying their portfolio and leveraging their investment power to weather the storm.
Some REIT sectors that are considered more stable than others are ones focused on properties in residential properties (people always need a place to live) and the healthcare sector.
Things can feel very uncertain during a recession. If your portfolio lacks diversity, a downswing in your main investment can bring down your entire value. By diversifying your investments, you can safeguard your portfolio from unexpected swings in the market.
There are numerous ways in which to diversify, e.g., through equity investments in various asset types, REITs, and TIPS from the Treasury.
Amid a recession and the inevitable market shift that comes with it, even keeping your real estate portfolio can make for a good strategy.
Keeping the investment property you have purchased and renting it out generate monthly income. This way, you can cover investment costs and mortgage payments with the rental revenue.
If you don’t need to sell off your property at an unfavorable price due to the recession, you’re likely to see its value rise again once the economy improves.
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Create a Savings Buffer
Many Accredited Investors also have a day job that contributes to their wealth. During difficult economic times, they might face the danger of losing their daytime employment, which would leave them without a stable source of income.
Consequently, it is important to ensure you have an emergency fund you can access if your paychecks stop coming in. Financial advisors frequently advise saving six months’ worth of spending money in the case of an emergency. Having such a fund available will give you time to find employment or pursue other opportunities if necessary.
Whether another recession is imminent or won’t occur for a few more years, it’s best to be prepared. By taking steps such as adjusting your risk, increasing your liquidity, and paying down debt, you’ll be ready no matter what happens.