Economic uncertainty seems like the only certainty these days. That may have you wondering if you should bother to keep investing or just shove wads of cash under your mattress.
However, such drastic actions are usually based more on emotion than on data. Experts confirm that investing in real estate is a good idea, even during a recession.
In fact, many investors “won” during the Great Recession, thanks in large part to the tumultuous housing market. While there is some controversy around large investors buying up foreclosed homes, the fact remains that real estate is almost always a good investment.
In this post, we’ll look at some of the reasons real estate investing holds up during a recession and why it’s something you should still consider.
This is a point I often reiterate because there is so much truth to it. Yes, you may hear stories of people (unfortunately) losing their homes during these crises, it’s usually not difficult to find someone to occupy your properties.
In fact, people may be more likely to buy than rent during a recession. The reasons for this may be many, such as lack of confidence in the economy and not having money for a down payment.
And, of course, housing is a basic need for just about everyone. People may hold off on buying a new car or a new phone during a recession, but it would be quite rare for someone to decide to live on the street.
As long as your rental property isn’t completely neglected, you probably won’t have much trouble finding tenants – even during a recession. It also helps you’re home buying in a desirable area.
In general, though, proper management of your properties (including helping your tenants) is key to real estate success.
You might think of commercial real estate as being more dependable than residential real estate. After all, some companies have been around since the late 18th century!
However, the COVID-19 pandemic has served as a harsh reminder of why commercial real estate isn’t always reliable. After all, the pandemic forced many businesses to close – even some that had been in business for decades.
And that is why commercial real estate can be volatile. Commercial real estate is subject to market forces that don’t necessarily affect residential units.
Again, individuals and families are not going to move out on the street because times are tough. But when the burger joint in the neighborhood stops selling burgers because no one is eating out, they may well have to vacate.
A real-life example of this comes from a candy store near my childhood home closed in part due to COVID. The store had been open since 1956.
Indeed, the business world can be unforgiving. But people will always need a place to stay, no matter what the U.S. average rent may be, which means that residential real estate will remain strong.
I mentioned the Great Recession earlier, but that was not the only recession in US history. In fact, according to Acorns, recessions have occurred about every four years since 1900.
Before the Great Recession was the dotcom bubble. The “bubble” consisted of tech companies with massively inflated capitalizations. In the early 2000s, the bubble finally burst, causing the NASDAQ to fall from about 5,000 points in early 2000 to about 1,5000 points in late 2002.
Both recessions wreaked havoc on the stock market, but residential real estate investors didn’t suffer huge losses. In fact, Yahoo! Finance states that single-family rental assets were positive as a sector during the Great Recession.
This makes sense since the value of stocks drops after massive selloffs. But people sell shares of stock for a number of reasons.
During the dotcom era, venture capitalists would essentially pump and dump. They would buy up a bunch of shares in companies; the companies would get hyped up during their IPOs, then VCs would sell the shares when the company’s value peaked.
Rinse and repeat.
Small-scale residential real estate is unlikely to be put through such a gauntlet, however. It may change hands occasionally, but certainly not in the way dotcom stocks were.
Because real estate is separate from daily trading activity that stocks often see, it can provide stability when stocks are volatile.
Stocks are an incredibly powerful tool, but there’s a reason you hold them in a retirement account: you won’t access that money until after you retire.
Of course, there are some exceptions to this. Money in a Roth IRA doesn’t have an early withdrawal penalty. Dividend stocks can provide a nice payout.
However, the bulk of money invested in stocks relies on growth of the stock price to provide a return. This strategy does work well, but it doesn’t provide an income today.
As you might expect, that is where real estate investing comes in. While there are different ways to invest, including some buy and hold real estate options, you collect money every month in the form of rent charged to tenants.
As we have established in this post, a recession – whatever the cause – is not usually a reason to avoid real estate. That’s because people may curb discretionary spending during these times, but they will still need a place to live.
This also means real estate is not subject to the same market forces that can sometimes cause stocks to lag behind. During a bull market, stocks may outperform real estate, but real estate can still provide cash flow during a bear market.
Indeed, real estate provides steady cash flow, whereas stocks may not produce income until retirement.
Don’t allow a recession to scare you from investing in real estate.
Alongside some recession proof stocks, real estate can actually be one of the few assets that is still positive during these times; thus, it’s worth considering if you want to make your portfolio more resilient.
By Jessica Larson