The word on the street is recession.
Maybe it’s a long time coming – we largely dodged the second post-COVID recession experts predicted. Still, we’re now in a position where some top economists view it as a more and more likely scenario. (J.P. Morgan’s chief economist is giving us a 40% chance.)
Understandably, people are worried. We’ve already seen the stock market flinch more than once over the first quarter. Layoffs dominate the headlines.
But here’s the good news – we see it coming. And that means we also have time to prepare. And if you want to shore up your assets to protect them from recession erosion, we have the solution:
Real estate.
And believe us, we’re not just saying that because we’re real estate people. We’re saying it because we’re real estate people who have seen how it holds up. Let’s talk about it.
5 Reasons to Turn to Real Estate in a Recession
Reason #1 – Stable Income Through Rentals
One of the most significant advantages of real estate during a recession is the consistent income it can generate. While stock dividends may be cut and businesses may struggle, people will always need housing. That means rental properties are a consistently stable source of cash flow, especially in strong investment markets.
- Affordable Housing Demand: During economic downturns, people may opt for renting over homeownership, thereby increasing demand for rental properties.
- Recession-Proof Markets: Investing in locations with strong job markets, universities, or military bases can provide more stable occupancy rates during downturns. Look for markets with a diverse range of robust industries to sustain the economy during challenging times.
Reason #2 – Tangible Asset
Unlike stocks, which can lose significant value overnight due to market fluctuations, real estate is a physical, tangible asset that retains intrinsic value. Even if your property burns to the ground, the land itself has value!
- Land Has Inherent Value: While property structures may depreciate over time, the land itself tends to appreciate, especially in desirable locations or where land is scarce.
- Shelter is a Basic Necessity: The need for housing persists regardless of economic conditions. Other assets are far more speculative. While specific real estate investment strategies are speculative, it is a far more reliable way to invest overall.
- Inflation Hedge: Even during recessions, inflation can persist. Real estate acts as a hedge against inflation because property values and rents tend to rise over time, often in tandem with inflation. And should property values decrease, history proves that they will almost always bounce back!
Reason #3 – Lower Interest Rates
During recessions, central banks often lower interest rates to stimulate the economy, making borrowing more affordable. Investors stand to gain from both first-time financing and refinancing options.
- Lower Mortgage Payments: Investors can secure low fixed-rate mortgages, reducing their monthly expenses and increasing cash flow from rental properties.
- Improved Affordability: Lower interest rates make it easier to qualify for financing, allowing investors to acquire and scale their portfolios more efficiently.
- Refinancing Opportunities: Purchased a property when rates were high? Consider refinancing at lower rates, which can free up capital for additional investments or reduce your debt burden.
Further Reading: When Should SFR Investors Refinance?
Reason #4 – Potential for Long-Term Appreciation
While property values may dip during a recession, history shows that real estate markets tend to recover and appreciate over time.
- Buying Below Market Value: Recessions create opportunities to buy distressed properties at a discount due to foreclosures, short sales, or motivated sellers. Keep your eyes peeled for emerging deals.
- Supply Constraints: Housing supply often remains limited due to construction slowdowns during economic downturns. Given that we’re already in the midst of a supply crisis, it is likely to continue driving up property values in most markets.
- Demographic Trends: Population growth and migration patterns continue regardless of recessions. If investors capitalize on these trends, they position themselves to reap the benefits in the future.
Reason #5 – Diversification
Real estate offers diversification benefits, particularly during economic downturns when stocks and other investments may falter.
- Low Correlation with the Stock Market: Real estate prices tend not to move in tandem with stock prices. That provides a significant hedge during a recession, when stocks grow especially volatile.
- Multiple Revenue Streams: Investors don’t benefit solely from rental income or property appreciation. They benefit from them both at the same time, plus advantageous tax strategies!
- Asset Stability: Real estate values tend to be less volatile than other assets, providing stability for long-term investors.
Real estate can be a resilient investment during a recession, providing cash flow, long-term appreciation potential, and stability compared to other assets. Just remember this: successful investing still requires careful market selection, sound financial planning, and diligent risk management to navigate economic downturns effectively.
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