As the global economy continues on a downward path, people of all walks of life are looking for investment safe havens to protect their capital.
It is common to hear that residential real estate investing is safe regardless of economic swings. While this can be true in many cases, those who fail to carry out their strategy within the context of a recession could put their investments at risk.
To help guide investors with real estate strategic planning during periods of economic unrest, the experts here at Great Jones have put together a quick rundown of the top considerations for residential real estate investing during recession times. At Great Jones, we have experience in a number of markets from Florida to Texas so we know all that needs to be considered during an economic downturn. If you’re looking to invest or need Orlando property management or Austin property management for your new investment, we’re here to help. Read on for our top tips on real estate investment during a recession.
Real Estate Investment Risks During Economic Recessions
While real estate typically doesn’t experience the same exposure to economic downturn as other types of investments, there are certain risks worth considering before making any major decisions in the market condition.
Four major investment risks stand out for real estate investors and landlords during these periods.
- A limited number of buyers
- Higher risk of tenancy defaults
- Government intervention (eviction suspensions)
- Shifting competition among certain stakeholders
Let’s take a look at each major risk in more detail.
1. Limited Buyers
With recessions come a decrease in buying power for the majority of the population. This can pose an opportunity for many real estate investors, but also a risk.
Simply put, limited demand for real estate means lower prices. While lower real estate prices are a good thing for those that want to enter the market, they pose risks for those that already own real estate assets.
Luckily, real estate is less exposed to depreciation than other assets, so most current property owners should be safe long-term. However, short-term investors and so-called “flippers” might be stuck holding assets longer than they would during a more fluid market.
2. Tenancy Defaults
Recessions almost always mean defaults and foreclosures—a major culprit of the 2008 financial crisis. While this again could present an opportunity for a real estate investor looking to capitalize on low-cost property, it puts landlords and rental investors in a tough position.
No one wants to kick a tenant out of their home, but recessions make the action unavoidable. Any investor that operates in the rental market during recession would be well-advised to prepare for defaults and evictions. Also, keep in mind that eviction may lead to a vacant property that would be difficult to fill during a recession.
To minimize exposure to this risk, consider taking the following steps to prepare for the inevitable:
- Make an action plan for rental collections and notices to avoid delinquent rent
- Hire a property management company to help deal with defaults and complaints
- Provide your tenants with fair warning that you will not accept defaults that exceed lease terms
- Be sympathetic and try to maintain good relationships with tenants until action is needed
The last point is of the utmost importance. Tenants are more likely to pay their rent on time if they have a good relationship with the landlord. This applies even in a recession.
You can limit your risk by knowing how to be a good landlord and that includes being transparent and compassionate towards your tenants.
3. Suspended Evictions
Government intervention during a recession is a foregone conclusion. Many states recently suspended evictions to help combat the economic effects of COVID-19 on renters.
While this was a welcome action for the majority of the public, many landlords were justifiably concerned. Eviction moratoriums present one of the most blatant risks for rental property investors during recessions and are generally unavoidable.
The good news—eviction halts typically only last a month or two and you may be able to recoup your losses once the period ends. Again, maintaining good relations with your tenants will go a long way in guaranteeing repayment.
Luckily, there are ways to offset your potential losses
- Instead of threatening evictions, offer tenants a payment plan if they can prove they are suffering from economic hardship due to the recession.
- Monitor news and announcements regarding evictions and foreclosures closely, as regulations can shift rapidly during times of uncertainty.
- Consult with lawyers and property managers to determine how long you must put up with default payments before evictions need to be carried out.
When eviction halts end, rental property owners have two options: work with their tenants to keep them in their homes or proceed with evictions. Obviously, the former is the preferable option, but recessions, unfortunately, will result in some evictions.
4. Shifts in Competition
Lastly, recessions create shifts in the competitive dynamics of the residential real estate market.
- Buyers – Competition among buyers decreases as the general public avoids large purchases.
- Sellers – The number of forced sales goes up, but the level of strategic sales goes down, decreasing real estate prices and negatively impacting sellers.
- Flippers – With fewer buyers and strategic sellers, flipping becomes less profitable.
- Real estate agents – With fewer buyers and sellers, competition among real estate agents goes up, making the business less profitable and more cutthroat.
But what do these dynamic shifts mean for the majority of residential real estate investors?
Fewer buyers enable investors to buy investment property at a lower price but extends the amount of time that properties must be held to realize returns on investments. This means that residential real estate assets must retain some liquidity and cash on hand to offset the effects of being forced to hold assets longer.
Real Estate Recession Investment Opportunities
Despite the risks associated with investing in real estate during recessions, risky housing market conditions can present major opportunities for investors to enhance their wealth through real estate.
Real estate assets hold their value even during recessions, making it an ideal market to turn to during widespread economic strife. Some of the major opportunities that make investing in real estate a good idea are as follows:
- Distressed sellers and lower property prices
- Cash investing opportunities
- Generation of stable income through rentals
- Lack of volatility
Let’s take a closer look at each factor to shed light on why real estate investing in a recession works.
1. Distressed Sellers and Lower Property Prices
One opportunity for investors in residential real estate is lower prices. While this presents a risk to many investors due to the need to hold assets longer, lower prices also always mean more profit potential.
Economic downturn will force various groups to sell properties at lower prices. Recessions, for example, come with foreclosures and distressed selling.
Investors that can capitalize on these sales can make a ton of money in the long run. However, expect to hold the assets long-term and sell once market conditions have improved.
2. Cash Investing
Recessions love cash. Real estate investors typically work with cash much more often than the general public, so this is good for them.
Any investor that offers cash for properties will be able to garner reduced prices, especially during recessions. This will enhance your ability to get a higher rate of return on real estate investments long-term.
To ensure that you have the ability to compete in the cash market, it is always a good idea to try to stay ahead of a recession.
- Consider liquidating some of your assets when you expect a looming recession to hit
- Leverage your cash to get better deals on properties, contractors, and labor
- Try to maintain cash levels and not over-leverage your funds
If you can maintain liquidity during a recession, you will be able to counteract the competition and uncover lower prices that would not be available during economic booms.
3. Rental Income Streams
While the risk of defaults and eviction moratoriums do exist within the rental market during a recession, the stable income that is generated by investing in this industry cannot be ignored.
Few investment opportunities produce stable monthly cash flows like rental investments, making it an ideal segment to consider during a recession. To avoid the risk of losses due to defaults, take a specific approach to new rental investments:
- Avoid investing in rental properties with a high risk of default such as low-income housing.
- Sign longer leases to keep residents in the property throughout the term of the recession.
- Make sure you employ credit checks and screen tenants carefully before signing leases.
- Set fair rent prices to keep your tenants happy and ensure monthly payments are made in a timely manner.
- Contract a property management partner, like Great Jones, to handle rental collections, tenant queries, and service appointments for you—this is guaranteed to increase tenant satisfaction and protect your monthly cash flows.
Rental properties are by no means recession proof, but if investors choose their tenants carefully, they can avoid the pitfalls that produce risk.
4. Lack of Volatility
What makes investing during recessions so risky? Volatility.
Volatility plagues almost every other type of security during recessions, enhancing risk. A great example is the stock market, which witnesses violent surges during times of economic uncertainty.
This just isn’t the case with real estate. Yes, prices do go down, which can be bad news for investors trying to offload some of their assets.
But generally speaking, the residential real estate market remains stable even during a recession. This makes it the ideal market for making strategic, low-risk investments to weather the storm of economic uncertainty.
Is Now a Good Time to Invest? – The Bottom Line
Residential real estate investments provide safe havens to investors during an economic recession. As long as investors are aware of the risks, enhanced opportunities available in the market make it an ideal time to invest in real estate.
Due to stable returns and a lack of major volatility in the market, smart real estate investors should see their wealth grow even when economic strife hits the market. And with a property management partner like Great Jones, you can sit back and watch the returns roll in as we take care of everything else from tenant screening and placement, managing work orders, and handling rent collection. Contact our portfolio advisors to learn more about property management in Columbia, SC to Indianapolis, IN and everything in between.
