Real estate investors must inquire about the type of real estate investing strategy that can provide a secure income during a recession.
Table of contents:
- What Is a Recession in the Economy?
- Housing Recession: A Threat to Real Estate Investors
- Should You Invest During Recession or Wait?
- Is Recession-Proof Real Estate Investing Possible?
- How Can Mashvisor Help You Find a Recession-Proof Property?
- The Final Verdict
Economic instability seems to be the only thing that is permanent on the market—and it is instilling fear among real estate investors around the globe.
However, the fluctuating economic climate and the figures that are the main focus here do not necessarily have to be a cause for concern when it comes to real estate investing.
In fact, many real estate investors have managed to find the “light at the end of the tunnel” and make significant profits—even during the recession.
This issue has, in turn, raised quite a few questions regarding house prices rising, the matter of safety of investing in real estate today, and the anticipated housing market crash—among other things.
If you’re looking for answers, keep scrolling. We’ve covered everything—down to the last detail.
What Is a Recession in the Economy?
Before we touch on real estate investing, we should first remind ourselves what a recession means for the economy and what could be some of its leading causes.
Most importantly, we should discuss whether there is any hint of this happening in the US.
By definition, a recession is a period during which the state weakens—primarily in economic terms. And that unfavorable (to put it mildly) period usually lasts up to several months.
The recession is generally reflected in many people losing their jobs, a notable drop in GDP, and a significant decline in almost all business-related activities.
Now, for some good news:
Businessmen, professionals, and economists are continuously working on monitoring some of the key indicators that suggest that this period might be “around the corner.”
The National Bureau of Economic Research (NBER) usually gives the official report.
DISCLAIMER: You should make a clear distinction between recession and depression in the economy. Depression is far worse for the economy. The consequences are more severe, and it lasts for a longer period of time. In some cases, it can even last for years.
Related: How to Prepare for a Real Estate Downturn
What Causes Recession?
There are several notable causes behind a recession. However, the most common ones are:
- Unemployment
- Falling interest rates
- Bankruptcies, foreclosures
- Low consumer spending
- Falling asset prices (homes and stocks)
The government often decides to print out more money to end this period as fast as possible. Why? It’s so they can carefully lend it to borrowers who will help the economy “get back on its feet.”
Why Are Americans Worried?
There’s a point to why we’re mentioning all this.
The American population seems to be worried about recession knocking on their doors sooner rather than later.
Where is this concern coming from, exactly?
Even though economists have not set the alarm for when it might occur in 2022, the heads of businessmen and real estate investors are still turning towards particular factors that point in that direction.
Here’s a shocking finding:
According to a survey that was conducted at the beginning of the year, a staggering 81% of adults in the US do believe that there is reason to worry.
The possible risk lies in excessive inflations and interest rates.
So, if prices continue to rise, as is already the case, that could mean a potential collapse for US businesses. Spending power will simply decline sharply, and customers will slowly begin to retreat.
Housing Recession: A Threat to Real Estate Investors
Now that we have introduced the topic in a broader sense, it’s time to turn our attention to a specific type of recession—the real estate recession.
The “housing recession” generally has to do with the already mentioned decline in economic terms.
It usually occurs when real estate investors have trouble repaying mortgages and loans they applied for when buying an investment property.
In essence, they find it extremely hard to take care of their monthly repayments. And even though there is a way to deal with the recession in real estate, it can still take a long time to get it under control.
Causes of Real Estate Recession
If you’re in the real estate investing industry, you’ll want to look out for the following causes of recession:
- Housing affordability
- False demand or speculations
- Economic decline
Housing Affordability
The first cause comes down to housing affordability.
Naturally, when housing prices rise, the demand among investors decreases. That leads to them having to lower their expectations, which, in turn, leads to lowering their potential cash on cash return.
And if the investment strategy’s related to flipping houses, investors must reduce their prices to generate profit.
Interestingly enough, despite the prices being low, buyers may still be unsure whether they’ll be able to purchase the house on the market—or if it would even be a good buy.
False Demand
The next cause is closely related to false demand or speculations.
Here’s what might happen:
Real estate investors may be in a hurry when deciding to take out mortgages, buy properties, and sell them for profit at the mere hint of speculation about a recession in real estate occurring in the near future.
Due to this, a number of real estate investors tend to purchase real estate and create false demand in the real estate market—which further alarms the public.
Related: 10 Highest Airbnb Demand by City in Florida in 2022
Economic Decline
Finally, the economic downturn is a broad term that refers to all the difficulties that affect the general population. In real estate investing, it’s mostly reflected in house prices and interest rates mutually rising.
Additionally, with high unemployment rates, and a falling GDP, people are afraid of spending the money they saved up and are slowly but surely retreating from any type of investments.
How Do Housing Prices Affect the Market?
When we talk about the housing market, the prices of homes, and how they affect the real estate market, it’s also important to mention interest rates.
They are important for real estate investors because they help them determine the value of the real estate investment with more precision. Even more so, they help with deciding how much money they’ll have to set aside to buy a particular property.
Low-interest rates generally spike up the demand on the market and encourage real estate investing, while high-interest rates do the opposite, lowering the demand.
How Do Stocks Affect the Market?
Moving on to a topic that’s closely related to the topic of real estate—the stock market.
Those who monitor the situation on the stock market might find it easier to make calls related to business in general and, more specifically, real estate investing.
Low interest and mortgage rates can prevent the housing market crash—and keep investors and prospective buyers interested in investing in real estate.
Currently, mortgage rates are above 5%, which is still lower than pre-pandemic levels.
However, it should be mentioned that there’s a not-so-nice side of the stock market—that is, the psychological effect it has on buyers:
Low inventory and rocky stocks could potentially force buyers to give up shopping and lower their consumer confidence.
How Will Recession Affect Real Estate Investing?
If a recession were to happen sometime in the near future, here are the consequences that would be pretty much inevitable:
First and foremost, real estate investors may witness a significant depreciation in prices. And even though this might seem like a favorable sign for home-buyers, that’s just an illusion.
The value of homes and income would make it more difficult to apply for loans. Furthermore, strategies such as house-flipping would not give the same results as before.
If we just look at the peak of COVID-19, we can list countless examples where investors had problems and barely managed to make ends meet with long-term investments.
It’s also worth adding that future home buyers—or people who were generally looking to buy real estate—would now turn to short-term rentals.
The main reason for this “plot twist” is cost-efficiency:
With short-term rentals becoming the current number one option, the inevitable fact is that rent prices would increase, too. After all, investors have to somehow cope and not let it get the best of them, right?
The rise in rent prices is pretty much unavoidable in this scenario. Otherwise, it’d be almost impossible to run a profitable short-term rental.
So, future renters should be aware of the possible jump in prices.
Should You Invest During Recession or Wait?
Housing market predictions can serve as guidelines on whether to invest during a recession or to put your investment plans on hold.
Figuring this out on your own is not easy, though. So, let us offer some professional advice on what you should do—and how.
For starters, declining stock prices could serve as a sign that this is a good idea. If you have the financial means and a good strategy as a base, you are free to engage in purchasing an investment property.
So, it essentially comes down to money.
If your finances are solid, and you’re not too worried about any minor losses or delays, then you’re free to proceed according to plan.
On the other hand, if your finances are strictly dependent on the lender, it might be better to put this idea on hold.
One thing’s for certain, though.
The best type of real estate investments during the recession would be multi-family homes, short-term rentals, and foreclosures. The truth is that people will always need housing, and this type of investment opportunity could provide the investor with secure profits.
It may not be what you anticipated right away, but it’ll keep your business safe.
Related: Guide To Investing In Short-Term Properties With Ease
Is Recession-Proof Real Estate Investing Possible?
Building a recession-proof real estate strategy and benefiting from it is, indeed, possible. You just need to be educated on the topic.
And by the time you make it to the end of this article, you will be.
Here’s how to build up your strategy and make it recession-proof:
First, you will need to take into account your savings. Make sure that you have extra funds saved up in case financial hardships occur or the real estate market climate takes a turn for the worse.
Emergency savings should be a must, regardless of the investment.
If you’re going to need money for expenses, home repairs, or medical costs, and you want to retire from real estate investing in a couple of years, you’ll want to put your short-term needs first.
By doing this, you won’t be putting in too many assets and losing what you can’t compensate for at the moment.
The main point is:
You don’t have to wait until this worrisome period ends. You just have to decide on the right type of investment.
How Can Mashvisor Help You Find a Recession-Proof Property?
If you’ve made up your mind regarding real estate investing, you can make your journey a lot easier by utilizing investment tools that are designed to do the math for you.
The first step would be locating a suitable area and the exact property you’d like to invest in there.
Mashvisor’s Property Finder is created solely for that purpose—making it easier for real estate investors to narrow down their research and come up with a number of profitable locations within minutes.
Next, you will need to deal with the financial aspects of the investment property. And here, Mashvisor’s Rental Property Calculator—a built-in investment calculator that indicates the profitability of the investment—can help you tackle the numbers.
That’s a step you shouldn’t skip—especially during these times.
Mashvisor also provides real estate investors with a tool that helps them conduct a thorough analysis of the property in question, get homeowner data, and more. Yes, we are referring to Mashboard.
If you can’t decide which city to buy a property in, Mashvisor’s Property Finder lets you search for listings in up to 10 cities at once.
The Final Verdict
We have successfully closed the topic of taking a chance on real estate investing during the period of recession. It’s now time to reflect on the major factors we’ve covered so far.
Before planning anything, real estate investors must be familiar with what recession is, when will the housing market crash, and how that would affect the real estate market.
According to research, a majority of the US is worried that it might affect the housing market.
Even though the effects will be seen in housing affordability, false demand in the real estate market, and an economic decline, choosing to invest in real estate—and running a profitable rental—is possible.
The catch is finding the right type of investment property—these include multi-family homes and short-term rentals—assessing their profitability and ensuring that you have emergency savings in case the hardships of recession get the best of your business.
That’s all made easier with Mashvisor’s tools that do the heavy lifting for you.
Sign up for a 7-day free trial of Mashvisor.