The period of robust and consistent economic expansion since the pandemic seems to be coming to an end. Consumer prices continue to rise, but the annual inflation rate dropped to 5% in March. That’s significantly lower than the 9% reported in June 2022 but still much higher than the target rate of 2% set by the Federal Reserve.
The possibility of a looming recession could prompt some apprehensive investors to liquidate their assets, while others may focus on real estate ventures that show resilience during an economic downturn. In a recession, a portfolio may temporarily decrease in value, but for astute investors, downturns can present opportunities.
Whether you own investment property or are considering entering the real estate market during a recession, it’s crucial to have a profit-maximizing strategy in place and manage your portfolio wisely through an investment app or other platform. It’s common for investors to adopt a more cautious approach, but the most advantageous strategy, in the long run, is to take a more assertive stance by increasing investments in assets that can generate the highest returns.
Here are 10 strategies investors can use to protect and expand their investments during times of economic uncertainty:
1. Focus on Cash Flow
In uncertain financial times, it’s crucial to focus on finding properties that generate positive cash flow. These properties produce more income than expenses, such as mortgage payments, maintenance costs, and taxes. Experts recommend properties that produce 10%–12% cash-on-cash return after expenses. Investors should also look for properties that house long-term tenants and avoid properties that have high vacancy rates.
It’s vital that investors pay attention to their cash reserves when investing in rental properties. During a recession, there might be a longer interval between property acquisition and income generation, making liquid cash reserves necessary. Maintaining accessible cash reserves can help offset expenses in the interim and decrease reliance on securing capital from a lender. For investors who do need to rely on funding from a lender, most banks require at least a 10% down payment on second homes.
2. Don’t forget about location
When investing in rental properties, it’s crucial to understand the area and evaluate the overall market. An ideal location for an investment property would be an area with high demand and rental rates that can maintain a desirable profit margin. During a recession, a key strategy is prioritizing the location over the property itself.
3. Invest in multifamily properties
Multifamily properties are likely to experience a surge in demand during an economic downturn because individuals with financial difficulties may need to reduce their living expenses by downsizing. Those who previously resided in a detached home may opt to sell their property and relocate to a multifamily dwelling, such as a duplex.
Increased demand during a recession may reduce the number of units that sit vacant for an extended period of time. Investing in a multifamily property is also an effective hedge against inflation because when prices increase, investors can raise rental rates and maintain their revenue
4. Identify markets with strong job growth
Cities with solid job growth tend to have lower unemployment rates and higher demand for rental properties. This means investors are more likely to find tenants for their properties.
If tenants are unemployed, they may be unable to pay rent and may relocate to areas with better job prospects. That could disrupt investors’ rental income, so it’s essential to assess the economic climate before purchasing.
5. Focus on short-term rentals
Short-term rentals can be a good investment during times of economic uncertainty. These rentals typically generate higher cash flow than long-term rentals because they are rented for shorter periods of time. Additionally, short-term rentals can be easier to manage because investors can set specific dates when the property is available.
6. Diversify your portfolio
Diversifying a real estate portfolio is a strategy that can help safeguard investments. There are various ways to diversify holdings, including dividing investments by geographic location, asset class, and investment strategy. For instance, investors who typically invest directly in real estate may want to explore private equity investment funds that acquire self-storage properties throughout the U.S.
7. Buy now, sell later
The best time to consider a buy-and-hold strategy is during a recession. Buy-and-hold investors aim to purchase properties at low prices to maximize their profits, similar to flippers and wholesalers. However, buy-and-hold investors don’t usually sell the property immediately. As the market recovers, investors can continue to receive passive income from renting their property or sell it for a substantial profit.
8. Fix and flip
The key to a successful flip is to buy low and sell high. It’s advisable to implement this strategy when property values are on the rise, usually during the economy’s recovery and expansion phases. These phases can last several years, so it’s an excellent opportunity for house flippers to scale their business and generate significant profit.
9. Consider REITs
A real estate investment trust can be a good fit for investors who want the diversification benefits of real estate without the commitment and responsibilities of directly owning property.
A REIT is a corporation that owns or invests in real estate properties that generate income. These properties can include apartment complexes, data centers, hospitals, retail centers, warehouses, and more.
REITs are publicly traded on the stock exchange, and they attract more than 150 million American investors, mainly through retirement plans, such as 401(k)s. Since the 1960s, they have exceeded inflation by an average of 6.4% each year and consistently outperformed stocks.
10. Build a relationship with a lender
Investors need timely access to funds, particularly with private financing or, better yet, a hard-money lender. Obtaining funding for the first time during a recession can be challenging because most lenders tend to be cautious about lending money. But lenders who have a relationship and successful history with an investor may be more inclined to provide quick access to funds. By networking with other investors, brokers, and lenders, you can learn about new opportunities and gain valuable insights into the market.