The novel coronavirus pandemic has had a profound effect on the US economy. As a result, many are worried that a nation-wide recession is imminent. This has left many investors asking: “How can I recession proof my real estate business?” In today’s blog post, we’ll briefly examine the possibility of a 2020 recession and discuss ways to recession proof real estate investments.
Will the COVID-19 Pandemic Cause a US Recession?
Will a recession occur in 2020? In order to properly answer this question, we need to review what a recession actually is. The typical definition of a recession is a period when economic output contracts for two consecutive quarters. A recession is also a period between an economic peak and a trough, making it the opposite of an expansion. The US definition is set by the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee. The NBER also considers other factors for the determination of a recession, including inflation-adjusted GDP, industrial production, income, and employment. While recessions are a normal part of large-scale economies, they can be very detrimental depending on duration and severity.
As it pertains to the coronavirus, many economists believe that the nearly 11-year US expansion will come to an end in the second quarter of 2020, which ends on June 30. A Bloomberg Economics model, for instance, predicts that there is a 100% chance a recession will occur within 12 months. Economists at Goldman Sachs Group Inc. and Morgan Stanley also foresee a worldwide recession as a result of the COVID-19 pandemic.
How to Recession Proof Your Real Estate Business
Currently, it is impossible to know how severe and long the expected recession will be. However, there are optimistic differences between the possible recession and the previous one, due to the subprime mortgage crisis. For starters, Americans are less in debt now as they were then. In addition, an increase in mortgage refinancing has put more cash in consumers’ pockets. Nonetheless, investors should take specific steps to recession proof their real estate business. Here are five ways to recession proof an investment property business.
1. Do NOT Sell, Buy-and-Hold Instead
One of the best ways to hit the bank with an income property is by selling it. During a recession, however, selling an investment property is not a favorable investment. It is much better to wait for the recession to end if you want to sell a given property. Instead of selling a property during a recession, hold on to it. A buy-and-hold investment strategy is a great way to keep your real estate business stable and profitable during a recession. Doing so increases liquidity and long-term return on investment, which are must-haves during a recession.
2. Commit to Long-Term Investment Strategies and Properties
You should also commit to a long-term rental strategy to keep a real estate business recession proof. Long-term investment properties provide consistent cash flow and income. Single-family homes, multi-family properties, and townhouses are excellent examples of long-term income properties. They also have less turnover, the costs of which will be a hassle during a recession. Be sure to negotiate long-term lease agreements, a minimum of 6 months, with tenants beforehand. Even if doing so means offering lower rental rates, keep in mind that it is vital to maintain long-term tenants during a recession. The potential decreased rental income is much safer than the possibility of having a vacant rental property and negative cash flow.
3. Reduce Costs for Tenants
Speaking of tenants, there is another method to create recession proof rental properties. This involves reducing the costs of rentals for your tenants. Tenants not only have to deal with monthly rent payments, but they also pay for electricity, water, and heating bills. These additional costs can chip away at their paycheck, which is not conducive during a recession. As a landlord and real estate investor, consider finding ways to reduce these costs. Installing higher grade windows, for instance, can significantly reduce a tenant’s heating bills. You can also consider converting to solar panels in order to minimize utility costs. Any cost-saving improvement will be beneficial to both your tenant and real estate business during tough economic times.
4. Improve Tenant Retention
The logic behind lowering rental rates and reducing costs for a tenant is to maximize tenant or resident retention. As hinted at earlier, the impact of vacancies and their costs will be magnified for a real estate business during a recession. Not only that, but many other landlords will likely lower their rent as well. This increases competition for your rental property business, effectively pouring salt on the wound that is a recession. As a result, you should keep your investment property well-maintained, and even consider adding new (necessary) amenities. Anything that increases tenant retention will be a positive. This, however, does not mean acquiescing to any and every tenant demand. Be sure to retain good tenants. An effective screening process will ensure you have the right type of tenant for your rental property.
5. Look for Various Income Opportunities
Maintaining the profitability of your real estate business is a must during a recession. As a result, you should look for ways to control and generate a profitable, recession proof portfolio. Usually, to many investors, this means increasing the rental rate of a property. As previously mentioned, however, this will have adverse effects on tenant retention. Instead, consider adding new streams of income to your property by adding high-demand services or facilities. Examples include coordinating housekeeping services, dog-walking services, installing coin-operated machines, and more. Also consider expanding your small business to include passive, recession proof investments such as certain REITs and real estate crowdfunding projects. Be sure to research these thoroughly to find ones that will withstand a recession.
The Bottom Line
As of the time of this writing, it is highly likely that the US will enter a recession sometime in 2020. By following these five steps, you will be able to recession proof your real estate business and maintain a profit.
How do you plan to recession proof your business during these tough times?
To expand your recession proof business and overall real estate portfolio, click here to start looking for and analyzing the best investment properties in your city and neighborhood of choice.