Real estate properties are investment assets that offer one of the best hedges against inflation. Research shows that real estate investments tend to emerge stronger during economic turmoil. Compared to other investment assets, real estate is highly adaptable and flexible during financial crises.
However, it’s still advisable to make your real estate investment portfolio more resilient to recessions to protect your finances, even if it’s hard to predict what will happen to your properties when a recession hits.
Learn actionable tips and strategies for building a recession-proof real estate portfolio.
What Happens to Real Estate During a Recession?
In a recession, there is continuous negative economic growth regarding income, trade, output, and employment, typically in two consecutive quarters. Many factors contribute to a recession, such as a stock market crash, loss of consumer confidence, and high-interest rates.
For the real estate industry, a recession can be detrimental in many aspects. It can cause a decrease in demand and financial instability for investors and buyers, resulting in a slowdown in sales and potential depreciation of property values.
However, there are still opportunities during this challenging time. For instance, you can acquire lower-priced properties and negotiate more favorable terms with sellers.
Although there are particular upsides to an economic downturn, safeguarding your assets is still in your best interest because you can’t guarantee their viability during a recession.
5 Recession-Proof Real Estate Investing Tips
Real estate investing entails knowing how to protect your assets during economic downturns. The following are some recession-proof real estate investing tips to help you thrive through difficult periods.
1. Consider risk and yield
When banks anticipate an incoming recession, they typically relax their lending requirements and lower their interest rates. You can take advantage of this situation by making strategic investments. It’s a good time to borrow since interest rates and buying prices are low, meaning you can sell assets at a considerably higher figure than you bought them.
However, make sure you calculate your risks carefully. Consumer appetite tends to be low during recessions, so you might be unable to sell assets quickly. In a recession, the best thing to do is to keep your debts low and stick to low-risk investments.
2. Diversify your assets
You’ve probably heard experts say it’s a mistake to put all your resources into one investment. If that one asset underperforms or fails altogether, your return on investment (ROI) is at risk. Undiversified investments can result in wasted time, effort, and money. Conversely, diversifying your assets is a wise decision to protect your portfolio better.
Real estate diversification spreads your investments across multiple properties, asset classes, or geographic locations to minimize risk and maximize returns. It helps reduce risk if a crisis affects a particular real estate class or location.
Several real estate investments—residential condos, commercial space, and office buildings—are recession-resilient and are worth the investment.
3. Mitigate liquidity risk
Liquidity risk in real estate refers to your potential inability to sell a property quickly, which can be a problem if you’re looking for immediate cash. One of the best ways to decrease your liquidity risk is to get creative with your financing options.
You can consider offloading underperforming properties at their peak value or getting a line of credit from banks or personal loans from private lenders. Alternatively, you may consider lease options or seller financing to decrease liquidity risk.
4. Pay off your debts
Before a projected recession, banks typically lower interest rates to encourage people to borrow and spend money. Here, the goal is to stimulate economic activity. These offers can help you settle as much debt as possible to improve your financial health.
An effective way to decrease debt is to increase your payments beyond the minimum. This way, you can pay off the interest on the balance faster. You may also negotiate a shorter term to reduce the interest you incur during the loan period.
5. Focus on cash flow
During any recession, it’s crucial to maintain a steady cash flow to keep you afloat. Investing in stable properties is an excellent way to keep the money coming in. The best thing you can do is research or enlist a professional’s help to identify and purchase assets with predictable income and low risk.
Aside from this, ensure you have cash reserves to cover unexpected expenses and avoid dipping into your savings accounts that may put your cash flow at risk.
Real Estate Investing and Navigating Economic Uncertainty
Real estate investments remain one of the safest and most lucrative assets to acquire. However, it is still susceptible to the potential impact certain economic events like inflation or recession can cause. Remember these tips in creating a plan to ensure your investments can withstand and succeed amid unpredictable times.
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