A recession can make investment decisions trickier. No one wants their hard-earned savings placed in an unsafe investment fund while the economy tanks. That’s why real estate is a great place to turn in any economy.
Real estate is highly stable even within recessions. Out of the last five economic downturns, only two saw home prices drop at all. The 2008 recession plummeted home values because the entire downturn happened as a result of speculation within the housing market.
The simple truth is, housing is always in demand. Real estate represents a level of security not found in many other investments. And starting a real estate investment in a recession—or any economy for that matter—can be as simple as following these five steps.
Step 1: Set Investment Goals
There are many methods to real estate investing that can benefit investors of all types. Whether you are looking to quickly flip a fixer-upper or invest long-term in a rental, starting a real estate investment begins by setting clear goals.
Depending on the state of the market and the exact features of the recession at any given time, your investment goals may differ. For example, the recession caused by COVID-19 saw interest rates plummeting to record lows. Taking advantage of these rates might mean investing in long-term rental properties. Profit margins will grow over time, with properties potentially paid off more quickly.
Ultimately, the path you go for your investment comes down to how involved you want to be with a property. Are you looking for a quick return or are you more interested in a passive source of income? Your investment goals—as well as the work you’re willing to put in—will inform your real estate investment in a recessed economy.
Step 2: Find an Ideal Market
Just because a recession rages across the nation or even the world doesn’t mean you can’t find areas in which real estate is thriving or has room to thrive. This means a location in which houses and rentals are in high demand, there is a relatively stable job market, and other features propagate that will draw interested tenants.
First, explore the vacancy rates in an area. If rates are averaging much above 4%, it may be occasionally difficult to find a tenant, which will cut into your revenues. A thriving environment for a real estate investor has vacancy rates between 2-4%, so strive for these markets as much as possible.
Recessions can make employment levels difficult to work around in many places. However, if an economic downturn is prompting a mass exodus from an area because of lack of work, it won’t bode well for an investment. Research the state of the local economy before settling on a location.
Finally, the appeal of the location itself can appeal to tenants through a variety of factors. Boise, for instance, is in high demand due to the recreation opportunities nearby. Additionally, the pandemic has created desirability in low-density areas. Places like Boise have room for growth. Explore the offerings of any location to determine what might appeal to your renters.
Step 3. Budget
You should never begin an investment without thorough budgeting and consideration of all necessary expenses. A recession means you need to be even more cognizant of how to maintain positive cash flow for an investment.
To limit the difficulties of acquiring and managing enough liquidity to get an investment off the ground, it is best to invest in a property that can offer cash flow quickly. Consider purchasing a property that can rent with little initial overhead.
Alternatively, if you have a large enough pool of liquid cash from which to draw, you can plan for extensive renovations and longer downtime. Just be sure to study the current market to ensure that you can get a good return on an upgraded property, even during the recession.
Financing might be available to you with the right qualifications, but the more liquidity you have ensures the safety of an investment as you get your property off the ground.
Step 4. Understand Financing and Tax Considerations
When it comes to acquiring the liquidity needed for an investment property, financing is often required. However, financing for an investment property doesn’t work the same way that it does for a first home. To acquire a second home, you will need at least 20% down to open up your financing options. In a recession, this number can be even higher.
There are a few ways you can go about acquiring the funding for your next investment property, even in a recession. Here are just a few of them:
Borrowing against home equity. A home equity line of credit (HELOC) allows a homeowner to take out a loan against the value of their current home. This can be especially helpful in acquiring an investment property while keeping your interest rates low.
Borrowing from a 401k. You can borrow from your 401k retirement account to acquire an investment property. This can add some risk to the investment process, but the right real estate purchase will help you build a greater savings for the future.
Acquiring seller financing. This option will not be available in every circumstance. Buyers can request financing directly from the seller, offering them monthly payments rather than an up-front sum. While this can be tricky and requires thorough legal agreements, you can potentially begin your real estate investment without the need for traditional financing institutions.
No matter your choice of financing, you need to also take into account the tax obligations surrounding each property and borrowing avenue. Certain loans and renovations can make for greater tax deductions, while others will present additional obligations. Always consult with tax and finance specialists before making an investment decision.
Step 5. Find the Perfect Property
When you’re prepared to acquire the funding for a real estate investment in the ideal location, you are ready to start the search for an individual property. During a recession, many property owners try to sell off properties they see as potential losses. Do not get drawn into bad deals by seemingly good offers.
Instead, examine all the variables to find the right unit for your investment. Whether you are looking into a multifamily complex, single-family home, or condominium, consider all the factors of the surrounding area.
What are nearby schools like? How are crime rates? What are nearby units renting for?
Finding the perfect investment property takes thorough research. If a deal seems too good to be true, it likely is. Take you time and consult professionals to make the best possible decision.
Beginning your real estate journey can be daunting. Luckily, there are plenty of available experts out there to help you, no matter what the state of the economy. Consult finance agents, realtors, and property managers to maximize the potential of your investment property.
For more information on real estate investment and property management, contact 208.properties today.