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If there’s one thing I learned throughout my journey as a real estate investor, it’s picking the right time to invest. So, taking this logic, we might as well steer clear of investing when the economy is going through a recession. Why stay for the buffet when the whole Titanic is about to capsize?
It all seems so counter-intuitive. Why consider investing when the economy is looking more like thunderstorms than sunshine in the near future? As we’re going to explore together below, it’s all about keeping perspective and being patient and persistent. Even COVID-19, with far-reaching implications on retail, office, and luxury commercial spaces, still presents opportunities for those ready with a plan. I would go so far as to say that the largest enduring wealth on the planet has been created by those who invested in time where others were too scared or unprepared to do so. The now famous maxim from Warren Buffet is still true now more than ever. He famously surmised during his rise to fame and wealth that successful investors are “greedy when others are fearful and fearful when others are greedy.”
While the stock market has recovered much of the value it had lost at the height of the pandemic, things remain uncertain for the rest of the year and into the next (2021). Certain underlying fundamentals of the economy are slowing and showing signs of strain. Meanwhile, COVID-19 infections are reaching record highs while the country gears for the upcoming presidential election in November in a country already radically polarized in what the future of the country should look like. This is creating a cocktail of uncertainty that sends most investors reaching for the nearest bottle of Guinness (or whatever your favorite adult beverage is!).
Traditional investments like stocks and bonds are always vulnerable, but that shouldn’t stop people from taking a step back and pursuing a different type of investment: real estate.
At this point, you might be wondering whether I am that crazy since most of us have felt (and are still feeling) the effects of the financial world crumbling in 2008. But let’s look beyond that and be a little more realistic / pragmatic.
Allow me to break down some of the advantages of acquiring an investment property during a downturn. And let me tell you this: It’s not as crazy as it sounds.
When the collapse of the financial system took hold in 2008, everyone pointed their fingers at real estate as the cause. The real truth is that the blame lies in lending industry behind it (See “the Big Short” the film for more information on this). These industries facilitated the purchases of properties with people that had no place owning these “subprime mortgage products” inside “CBOs” further exacerbated by the derivatives market. Nowadays, lending on real estate has very strict guidelines that has held up and remained constant since the Great Recession.
Land and home ownership is now even more in demand. Who doesn’t want a “Zoom room” to conduct all of their meetings and have a quiet place to concentrate and work? Meanwhile, lending is very robust and active with people buying plenty of homes. These buyers are qualified and are meeting the post-2008 lending criteria to credibly own their own homes. This is being facilitated by extremely low interest rates, which, are at the lowest levels ever (0%). So, even though there may still be a crash in the coming years, real estate is not anticipated to be the driver of a repeat situation in 2008.
I wrote in a previous article about the advantages of REI over other investment options such as securities. In case you haven’t read that yet, give it a read.
At any rate, I would like to point out the fact that the real estate sector is set up to be insulated from volatility. One reason is that there is always a demand for housing since it will always be a basic need in the United States (alongside food, water and basic utilities). During the 2008 subprime mortgage crisis which affected millions of single-family households, the demand for multifamily housing saw an uptick as people began downsizing and the prospect of owning a home became less practical. According to a recent CBRE research paper, the multifamily sector outperformed other sectors of economy throughout the crisis.
In that regard, the demand for rental units tends to increase during a recession. Depending on what type of asset class you own, you’ll have people that have the ability to “downgrade” by moving into an apartment rental situation. This situation helps alleviate risk of having an empty apartment complex (or a full complex with tenants unable to pay), making it easier for you to maintain your profit margins. Mid-sized apartment complexes are a good start since they generate consistent revenue and fixed debt over the medium term (5 to 10 years).
These insights alone should give you a good enough reason to consider REI when all other stocks and bonds don’t provide the same level of assurance.
Not only is there is an underlying demand for housing, but it’s flexibility for you (as the lead investor) to adjust who you want to target as your target tenant base maximizes options for the return seeking investor in any economic situation. This renders real estate as an ideal option for investors to build stable revenue streams and adjust amenities and advertising to attract the right type and price point for renters. Investors thereby adjust rental rates and implement other value-adding components. These should help reduce the impact of interest rate increases and ensure income stability. In that way, real estate assets can be modified for added value in any economic climate.
When you have a business that people need in any economic situation, you have options, as long as you have control. You can reduce expenses by taking on property management yourself, lowering rents to raise vacancy, do your own advertising, etc. This flexibility allows you to run lean if needed to keep the building and the business profitable by thinking about ways to be more efficient in operations.
In an economic turndown, those who have cash will be able to pick up bargains on the cheap. While this doesn’t seem any different than what a stock investor would do, don’t forget that you can magnify your investments by 3 to 4 times by borrowing a bulk of the purchase price, given that the property will be performing well in the downturn until the economy recovers (at least well enough to cover the property’s expenses and debt).
That way, rather than buying a single asset with your cash, you can take advantage of buying many and enjoying the benefit of 3 to 4 properties appreciating, not just one (all the while, your debt is fixed).
The investor who is able to buy properties cheaply enjoy another benefit – hedges on inflation. When the purchase is made, the interest rate at the time of purchase is locked in for a significant portion (if not all) of the property’s hold period. During that period, the effects of inflation will increase the rents and the value of the building without too much effort.
The gap between your fixed debt (now at record low levels at or around 0%) and income will widen over time simply from more dollars being put into circulation. In this way, you are betting that the dollar goes down in value, which is fairly safe given that the world is participating in Modern Monetary policy, where governments are getting used to printing their way out of problems. For the average person without any assets that hedge against inflation, this is a disaster. For us investors who keep money deployed in assets, it’s a privilege.
Real estate investing allows you enough leeway to structure your investment strategy and navigate the challenges that the current market climate brings. You wouldn’t be able to get the same advantages from traditional investment options such as stocks and bonds. It all boils down to your overall aptitude and execution in finding and operating deals that fit your overall investment strategy. In order to make the most out of your hard earned capital, those who live in expensive coastal markets should seek out-of-state markets with favorable rent to price ratios and decreasing housing stock (given population migration and existing demand in the market).
Recessions are a natural occurrence in every economy, but it shouldn’t spell doom for investors who are looking for profitable opportunities. So, the next time the economy’s seems a little less stable, you can always look towards REI to turn things around in your personal situation.
What do you think? How do you plan to invest in an economic downturn? Would you like to learn how to invest in real estate or do you have any additional questions? If so, reach out to us to schedule a time to talk!
