Investing in Real Estate During a Recession

By Michelle Clardie on 04/22/2023.
Reviewed by Dan Gatsby .

Recessions are a normal part of the economic cycle. They are not a cause for panic, but they are an opportunity to re-evaluate your real estate investing strategy. 

Investing in real estate during a recession requires evaluating your financial situation to determine your risk tolerance and analyzing your local market conditions to determine where the greatest gains can be made.

In this guide to investing in real estate during a recession, we’ll

  • Define recession so that we understand the market conditions we’re working with,
  • Consider whether or not you should invest in real estate during a recession,
  • Explain the reasons to invest in real estate during a recession, and
  • Give you five real estate investment opportunities that work well during recessions.

This is everything you need to know about investing in real estate during a recession.

How Are Recessions Defined?

A recession is defined by the National Bureau of Economic Research as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” 

This definition includes three factors:

  • Depth. The decline in activity must be significant. 
  • Diffusion: The decline must spread across the economy, rather than impacting only a sector or two. 
  • Duration: The decline must last more than a few months

Should You Invest in Real Estate During a Recession?

As we learned in our Is It a Good Time to Invest in Real Estate article, there’s never actually a bad time to invest in real estate. Even buyers who purchased property at the worst possible time in recent history (just before the housing market collapse in 2007) came out ahead as long as they held their properties through the recovery. 

However, personal finances play a factor in determining whether investing in real estate during a recession is the right move for you. If your primary source of income is in jeopardy due to the recession, for example, you might choose to wait until your job seems safe before committing a significant share of your income to an investment property.

But if you’re financially stable, and the recession poses no additional risk to your livelihood, there is no reason to wait. In fact, we have a few good reasons why real estate can be a particularly good investment during a recession.

Reasons to Invest in Real Estate During a Recession

Here are five potential benefits of investing in real estate during a recession.

1. Potentially Lower Purchase Prices

Home values don’t always drop in connection with a recession, but it can happen. When the economy become less stable, the uncertainty causes many buyers to shy away from large investments like property. And this lack of demand can result in lower real estate prices. This gives real estate investors the opportunity to get a good deal on a property that would have been worth more the year prior. 

2. Increased Appreciation Potential 

It is important to note that long-term appreciation in real estate is a given. Due to the natural scarcity of land, property values will continue to rise over time, even if they take a temporary dip during a recession. As long as you can hold your asset through the recession and recovery, you will see your property value come back up. 

Recessions can actually increase appreciation potential for investors. When property values are high, as we see at the peak of a housing boom, the market simply can’t support additional value increases. But, when property values dip, we make room for additional growth in the following years. You’ll notice that many of the fastest-growing markets are those that were undervalued in recent years.  

3. Stable (or Increased) Renter Demand

Boom or bust, people need a place to live. This means that there will always be demand for residential real estate. Demand from buyers may decrease, but demand from renters can actually increase. Perhaps first-time buyers decide to rent for a while longer while the market stabilizes. Or, maybe homeowners are forced to sell or accept a foreclosure that puts them back into the rental market (which we saw a lot during The Great Recession).

The need for housing offers some protection for rental property investments. While commercial properties may suffer as businesses downsize or close, residential rentals continue to perform, generating rental income for real estate investors under any market conditions.  

4. You Might Get a Better Interest Rate

During a recession, it is common for the Federal Reserve to lower interest rates in an effort to stimulate the economy. Lower interest rates mean that property owners can allocate less of their mortgage payment to interest, and more of the payment to principal. This means greater buying power for real estate investors!

5. Real Estate is Less Volatile Than Stock Market Investments

Which is the better investment in a recession: real estate or stocks? If you’re looking for stability, real estate is the clear winner because real estate is less volatile than the stock market. Between the steady cash flow of rental properties, the tax benefits of real estate investing, and the long hold periods of real estate, real estate is less susceptible to the ebbs and flows of the economy. 

How to Invest in Real Estate During a Recession

There are multiple ways to invest in real estate during a recession. Here are five of the best options.

1. Single-Family Rentals

Investing in rental property provides cash flows, appreciation over time, and tax benefits. Single-family rentals are particularly attractive during a recession for would-be-buyers who may be hesitant to enter the market due to economic uncertainty. This type of property is also attractive to would-be-buyers who cannot qualify for a home loan due to tightened lending requirements that typically accompany a recession. SFR rentals are also preferred over apartment units by homeowners who have lost their homes due to short sale or foreclosure as a result of the recession.

2. Multi-Family Properties

Multi-family properties hold one distinct advantage over single-family rentals during a recession: automatic diversification. By having multiple units rented, your rental income will not fall to $0 if one renter moves out. You’ll be able to offset any temporary vacancy losses with the income received from the remaining occupied units.

3. Non-Commercial REITs

A REIT (Real Estate Investment Trust) is a company that invests in income-producing real estate. You can buy shares in a REIT in the same way that you buy stock in a company. In fact, many REITs trade publicly on the stock market. Owning shares in a REIT entitles you to a portion of the rental profits in the form of dividends. 

If you are hesitant to buy real estate during a recession because your primary source of income could be compromised, a REIT gives you the option to invest small amounts of money (just a few hundred dollars instead of the tens of thousands it could take to buy a property).

4. Strategic Fix-and-Flips 

Traditionally, fix-and-flips were not recommended during a recession. The theory was that the property could be actively losing value even as it was being renovated because of outside market influences. 

But there are ways to invest in flipping houses wisely during a recession. For example, if you’re including an ADU (accessory dwelling unit) in your flip, you can effectively convert a single-family property into a multi-family property, boosting the value enough to see a strong profit, even in a declining market. You just need to make sure that ADUs are permitted for properties zoned as single-family in your chosen market. California, for example, has enacted legislation over the last decade to fast-track ADU permits, making CA one of the best states for real estate investing

Alternatively, you might decide to purchase a fixer-upper as your primary residence during a recession, then spend the recession renovating the property while you live on-site (this is called a live-in flip). The recession could result in lower labor and supply expenses, and you can sell when the market recovers. As an added bonus, you can get favorable mortgage loan terms by using the property as your primary residence during the flip.   

5. Real Estate Syndication

Real estate syndication is a modern twist on a classic real estate investment model favored by the wealthy classes of the last several centuries. Similar to joint partnerships, in which multiple high-net-worth investors pool their funds to purchase a property together, syndication allows today’s investors to buy into a deal with comparatively low investment minimums. The deal could be a ground-up development, a value-add project, or a core investment; investors get to choose which specific project(s) they wish to be part of. And syndication offers a stable legal structure, with each investor becoming a member of the entity that owns the underlying real estate. 

Syndication is ideal for investing in a down market because it allows you to leverage the financial support of other investors as well as the expertise of the project’s syndication sponsor to maximize returns while minimizing risk.

Things to Consider When Investing in Real Estate During a Recession

Before you invest in real estate during a recession, consider the following factors:

  • Location. The best cities to invest in real estate all retain high demand by renters, buyers, or both. Be especially careful if your local market is in danger of losing a large employer to the recession. An increase in unemployment could cause residents to leave the area permanently in search of better job prospects. 

  • Cash flow. Will you have enough cash coming in to cover your investment property’s expenses? 

  • Financing options. Getting a loan can be more difficult during a recession when lenders are less inclined to accept greater risk. How will you finance your real estate investment when you buy during a recession?

  • Diversification. It is never a good idea to put all your eggs in one basket. Diversifying between asset classes and locations can give your investment portfolio a level of protection in an economic downturn.  

  • Liquidity. Would you be able to convert your assets to cash fairly quickly? With today’s options for real estate as a liquid investment, it has gotten easier to liquidate your real estate holdings faster.

Recession-Proof Your Real Estate Investments with Gatsby Investment 

Gatsby Investment is a California-based real estate syndication company that specializes in maximizing return potential for real estate investments under any market conditions. 

With our ever-evolving investment strategies, we have built an impressive track record of profitable deals, earning our investors an average annualized return of 24.22% (from 2017 through 2022). 

If you are looking to grow your wealth through a recession, explore our investment opportunities today

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