Investors rely heavily on economic data to make effective decisions and take advantage of whatever conditions are available. Smart investors can make money in almost any environment, but nobody particularly likes having to deal with an economic recession. During an economic recession, the economy goes into decline, with stagnation or active declining growth in most sectors.
But what exactly does this mean for real estate investors? And how can real estate investors make do with an economic recession?
The Many Forms of Real Estate Investing
To start, it’s important to recognize that there are many different forms of real estate investing, and not all of them are impacted equally by an economic recession. An investor in commercial real estate with a broad portfolio of properties across the country isn’t going to have the same considerations as a small-time residential real estate investor that dominates a local neighborhood.
With the help of a property management company, you can work with expert advisors who are knowledgeable on the topic of real estate investing and get some guidance and direction on how you should adjust your portfolio. If you don’t have a property management company to work with, you should at least consider working with a real estate agent or a real estate investing mentor.
The Impact of an Economic Recession
An economic recession can affect real estate investing in many ways.
Primarily, you’ll need to be aware of:
- Tanking asset values. In an economic recession, prices typically decline. This is arguably most noticeable in the stock market, but it can also lead to a decline in home values. This is especially true if consumers are particularly pessimistic, if there are widespread job losses, or if there are other specific effects that interfere with the average person’s ability to buy a home.
- Strict lending. Lenders typically exercise more caution in risky economic landscapes. They may be less likely to approve your loan, they may have higher interest rates or stricter terms, and they may be harder to work with. This presents a marked disadvantage for investors who like to take advantage of financial leverage.
- Consumer pessimism. Consumer confidence typically drops before and during an economic recession. This often leads to stagnating momentum in the real estate market – and more complicated buying and selling patterns to identify.
These effects can lead to:
- Fewer (or more) buying opportunities. In some recessions, tight lending and consumer pessimism makes it difficult to find meaningful buying opportunities. In others, waves of foreclosures and less competition means buying opportunities are abundant.
- Asset appreciation stagnation. In nearly all recessions, real estate appreciation stagnates, making it difficult to maintain your previous growth.
- Interest rate dynamics. Recessions are often preceded by higher interest rates and followed by lower interest rates. Lower interest rates can be extremely valuable if you know how to use them wisely in securing new properties.
- Difficulty with vacancies. Economic hardship tends to increase tenant turnover, especially in expensive or hard-hit areas. You’ll need to have a plan for how to deal with this.
- Higher demand for affordable housing. Recessions also increased demand for affordable housing, which could be an incredibly valuable opportunity for an investor to capitalize on.
What You Should Do
So, what should you do if you anticipate an economic recession in the near future?
- Watch the news. Pay close attention to the news on a regular basis. An economic recession isn’t always easily identifiable, and it sometimes takes months or years to fully unfold. The more you pay attention to economic news, the better tuned you’ll be to contemporary developments.
- Keep some cash on hand. Optimize for some liquidity if you anticipate a recession. Having more cash on hand means you’ll be less likely to suffer from declining asset prices, and it also means you’ll be poised to take action if and when you discover great investing opportunities.
- Be ready for specific opportunities. There are interesting investment opportunities in every type of market, including an economic recession. If you know where to look, and if you keep looking actively, you can still find valuable additions to your portfolio.
- Prioritize cash flow. If you want to minimize risk in a recession, try to optimize for cash flow. Consistent cash flow can help you get through even the strictest forms of economic hardship.
Unfortunately, there’s no perfect strategy for how to manage your real estate investments in the midst of a recession. There’s also no perfect way to tell when or how an economic recession will manifest. However, if you study the right economic variables in the right light, you could equip yourself with the information you need to weather the storm and continue making profits in your investing strategy.
