Is Real Estate a Good Investment During a Recession?

Real estate strategies during a recession will also work during inflation.

With a little tinkering. Your initial reaction to a recession may be portfolio strategy. Recession-proof assets can balance stock holdings. On the other hand, too much real estate in your portfolio during a recession can make it top heavy and difficult to keep liquid. Remember the ‘sacred ratio’ of bankers and brokers – keep half your assets in solid, nearly immovable investments to safeguard them from your own emotions and keep half as liquid as possible to take advantage of opportunities that promise a quick turnaround. 

In a recession, is real estate a wise investment? Your strategy determines that. 

“Real estate is more solid than many other investments when the economy slows down,” says Nashville real estate broker Jeff Checko of Ashton Real Estate Group of RE/MAX Advantage.

“If homeownership is reduced, then people have to reside somewhere,” Checko adds.

Even in a bear market, a rental property can generate passive income if renters pay their bills.

Strategy

Recessions lower property values, making landlording simpler. “If you’re trying to purchase a new investment property, a recession means you’re going to receive that property at a discounted price,” explains Detroit’s MARK Z Real Estate Specialists CEO Mark Zawaideh.

Influx in a recession

If you want to buy numerous rental properties or have limited funds, that’s a positive. “If you’re making agreements in the in-between sector, there is money to be made,” Zawaideh explains.

Investing in rental properties, especially during a recession, requires a plan. To maximize rental property returns, follow these unwritten guidelines. 

Remember:

• Location remains key.
• Cash flow.
• Investing IRA funds requires compliance.
• Examine transactions.

Place, Location

Get the complete picture when assessing recession-proof rental property investments. “Don’t purchase the house, buy the location,” says Cornerstone Financial Services associate Ryan Shuchman. That involves finding regions with secure employment and job development. 

Before buying, check the economy because job shortages can disrupt your rental income goals. Shuchman said unemployed residents can’t pay rent and may leave to areas with jobs.

Lifestyle is another location factor

Zawaideh said renters prefer walkable, downtown locations. Investment properties in those areas may profit if a recession doesn’t change renters’ preferences. 

Cash Flow in a recession

Renting during a recession requires keeping cash flow in mind. Zawaideh advises cautiously adding cash-flowing rental properties to your portfolio in a market slump. “After costs and mortgage payments, property that still generates revenue.”

Cash flow rental properties reduce risk in a recession. Zawaideh says that buying low means only going higher. While buying a rental investment, don’t forget cash reserves. “In a recession, there may be more of a wait between acquiring the property and getting it to generate money,” explains Capital Fund Law Group partner Christopher Rogers. Liquid cash helps meet expenses and reduce the need to borrow. 

Follow IRA Funds Investment Rules

Purchase a rental property using a loan. Lenders tighten their belts during recessions, making borrowing difficult. In that case, a self-directed individual retirement account might buy an investment property and provide tax benefits. Nonetheless, there are guidelines.

Kelli Click, president of STRATA Trust, warns that investing in real estate with retirement funds has restrictions. Initially, the property must be investable. Vacant lots, undeveloped land, single-family or multi-unit dwellings, apartments, townhomes, condos, and foreclosures.

Mobile homes and timeshares are usually excluded.

Next, property use rules.

Click claims the IRS prohibits living in or using IRA property. You or a disqualified person’s company cannot make property upgrades or repairs. Hence, if you manage a painting business, you must outsource painting your rental property. If not, you’ll lose IRA real estate tax benefits.

Finally, remember that maintenance, repairs, property taxes, and even your earnest money investment when buying the property must come from the IRA to avoid tax repercussions. If you’re considering using a self-directed IRA to buy a rental investment, you need to plan ahead. 

“Ensure your IRA has sufficient cash to meet any property-related charges,” advises Click. 

Investigate in a recession

If something appears too good to be true, it probably is. Rogers expects many owners to sell properties they can no longer afford amid a recession. You may find discounts, but do your research. Rogers advises real estate investors to watch for warning flags like low income, poor location, tax or other liens, and visible neglect. A careful inspection, court records for liens, and local rental trends can help you assess an investment property’s short- and long-term possibilities. 

Shuchman advises asking why a house is for sale if you find a good deal. “Don’t buy someone’s problem child.”