Recession Impending: Can it be a good time for real estate investors?
Riding the roller coaster of changing economic climates
Since the onset of COVID in March 2020, world economies have been on a roller coaster of unpredictability. The turbulence has put the US economy on it’s ear, with influences from COVID-related impacts, as well as fiscal policies.
Economic forecasters predict that we may be on this roller coaster for a while. So what does it mean for you, the real estate investor?
Bargains
Many would agree that we are in the beginning cycle of housing values normalizing. With interest rates increasing, distressed properties are becoming more readily available. Traditionally, housing prices keep pace with consumer prices, however, the housing market has held overpriced values for some time—which creates even more opportunity for investors.
As an investor, you can look at this upcoming “recessionary” cycle as an opportunity to clean up your own portfolio—whether that means selling properties to reinvest in properties with better cash flow or adding distressed properties that you can pick up through foreclosures or other means.
Depending on your current situation, the main challenge relative to taking advantage of distressed properties is financing. Due to higher interest rates, capital may be harder to come by. (Read last week’s EIC article to learn more about raising capital).
Economic downturns can equal cash flow upturns
Historically, real estate remains one of the most stable investments, especially during an economic downturn. There is higher demand for rental properties partially because of two reasons: 1. property owners become renters, and, 2. renters staying renters longer due to the increased difficulty in being able to afford or qualify for a high interest mortgage as a new home buyer.
It is statistically proven that residential real estate provides a better hedge versus commercial real estate during an economic downturn, which we’ve realized during the pandemic as many businesses closed or reduced their workplace footprint due to the influx of the work-from-home culture. People need a place to live, yet businesses can shift their real estate models to become more efficient and appease new worker demand for flexibility in time and locale.
With an unstable economy comes an unstable stock market which impacts non-real estate investors, making real estate investors’ portfolios more stable during a downturn. The real estate investor can rely in stable income from rentals while others suffer from market losses, retirement account diminishment and loss of value or even employment income. Real estate investors know: cash flow will always be king.
The mindset to adopt during a recession
Here are a few tips to help you shift your mindset to a sturdy, positively-focused mindset during the recession and take the right actions to come out on top:
There’s no need for panic. If you currently have a property or several properties that are delivering positive cashflow, you have the best hedge against uncertainty. Making knee-jerk decisions based on the latest CPI or inflation index is ill advised. Stay the course and stay positive as you’re already ahead in the game.
First-time-investors can cash in. If you are working toward purchasing your first property, you’re in luck. More properties are coming on the market due to people cashing out of distressed situations or foreclosures. You will do better now than you would have six or more months ago when housing prices were overvalued and there were less foreclosures available.
Turn on your radar. Get more connected with opportunities for distressed properties as they will be flooding the market during a recession. Use the methods and resources discussed in our recent EIC article about Sourcing Off-Market Deals. Build relationships that can connect you with opportunities before the general public catches wind of them.
Be prepared with the potential need for financing. Reinforce your lending relationships. Negotiate better rates by leveraging the properties in your current portfolio to get the most value from a new addition to your property portfolio.
Work with your tenants. Check in with current tenants to see how you can be more proactive in the event they hit hard times or lose their income. Use the opportunity to increase lease terms to “lock in” cash flow with tenants in good standing. Work with and secure the tenants you have before venturing out to add more properties to your portfolio.
Network with other investors. Many investors use downturns to clean house in their own portfolios. They may be looking to sell a property in their portfolio that is facing a large capital expenditure like a new roof or HVAC system.
Maximize your cash flow. By working with tenant leases, as stated above, you can improve your property’s cash flow. The window for refinancing is closing fast due to rising interest rates, so if you can find a way to reduce your debt load, now’s the time before interest rates get into the double digit range.
Increase your liquidity. Although a more careful move during an economic downturn with rising inflation and pending stagflation, selling off a poor-performing property may be an option even when property values are decreasing. So when that perfect distressed property becomes available, you’ll have the cash to buy it and improve your property’s performance to cash flow in a more beneficial way.
Seek out portfolio diversification. During a recession, you may have more opportunities to diversify the types of real estate investments you have in your portfolio. For example, if you mainly have two to four unit properties, you could look at a mixed use or small 10-20 unit apartment building to diversify your real estate classes. You can also do this by investing in a different region with better tenant vacancies or lease values as economic downturns impact some regions differently than others. Another method of diversification is investing in the Empire Capital Fund where you can balance your active investing with passive investing.
Avoid riskier investments. As there may be higher-value investment classes, there may also be lower-value classes due to the economic climate. Peoples’ behavior changes during economic downturns. They vacation less. They sell their “second homes,” and hunker down and spend less. Riskier investments during a downturn include vacation homes, retail, B&Bs, small hotels and some commercial properties, as well as destination-focused regions where people vacation or travel to during healthier economies.
Pay attention to prices. Watch how home values are changing in your target market. Also, watch how rental leases change as well—they could drop or increase based on the market your investments are located. Watch interest rates, study lending trends and stay abreast of what other real estate investors are predicting in your area.
All in all, real estate investors are poised for greater opportunities during a recession or economic downturn. To help guide your investment strategy, reach out to Jennifer for a consult and portfolio review strategy so you are well-equipped to ride the roller coaster of uncertainty in style.