There are many things to consider when you begin looking to invest. One popular type of investment that can yield a high rate of return is that of an investment property. However, while investing in real estate is a great way to earn money, it’s important to consider the ways in which a downturn in the overall markets can affect the equity in such properties.
You may be wondering how you can protect your investment property if something such as a recession should happen. Fortunately, there are many steps you can take to make sure your real estate investment portfolio continues to retain value.
1. A smart investment strategy is crucial. Your current investment strategy will set the foundation for all to follow. Avoid overextending your investments. Look for properties that offer a continual return. Bear in mind you may see problems with such fiscal flow during a recession. Avoid cash flow problems during a recession by creating a cushion now.
2. Keep general growth in mind. Historically, investment properties have generated an annual rate of between six and ten percent. When a recession hits, corresponding rates of return from an investment property may fall in turn. Renters can lose their jobs and find it difficult to pay the rent. Commercial business owners may go out of business and also find it difficult if not impossible to pay the rent. A location may become less than desirable as there’s decreased money flowing in and decreased pedestrian traffic. During this time, the value may not keep up with inflation. Keep in mind values will probably regain full (if not more) value once the recession is over. Holding on and avoiding the temptation to sell can reduce any potential losses.
3. While a return of investment may sometimes fall during a recession, an investment property can also thrive in the market during a recession. It’s important to keep an eye on the long-term. Over time, the owner may find that the properties will pay off. Real estate is also much safer than the market. It’s very rare to see wide swings in the value of a home. Even during a recession, people still need a place to live.
4. Real estate is in constant demand. People want a good, safe place to live where they can start a family and put down roots. They are looking for places that allow them to get to work quickly and let them relax at home. As the recession goes on, interest rates start to drop and may stay low for a long time. This is why investors should avoid an adjustable rate mortgage on their rental properties. Interest rates may climb or drop, leading to unpredictable expenses. A standard mortgage is a better choice for those who wish to avoid such issues.
5. Owners should be particularly careful about foreclosure properties during any possible recession. Foreclosures typically sell for less than the going rate in any neighborhood. When a recession hits, this can affect the value of the property even further. This can make it harder for the homeowner to get the financing they need to fix up the property at the interest rate they need. Doing so can halt the buyer’s ongoing efforts to rent it out.
Learn More: How to Recession-Proof an Investment Property
This article has been contributed by Austin Winder from Land and Farm.