Are you worried that a correction in the real estate market will disrupt your real estate investments?
Between high inflationrising interest rates, recession fears and a shaky stock market, investors have plenty to worry about in 2022. We are already seeing a housing correction in some marketsand experts raising housing bubble concerns.
Where does this take you as a real estate investor?
Consider these strategies for investing in real estate during a real estate downturn, without worrying about trying to catch a falling knife.
Residential income properties
While house prices sometimes fall during recessions, rents rarely do. At worst, they stabilize for a year or two, as they did during the Great Recession. The consensus among economists is that rents will continue to rise throughout 2022.
So your rental cash calculations will not change, even during a recession or a real estate correction. Even if the value of your investment property drops, your rental income won’t drop, so you can continue to hold and earn cash while you stay out of the storm. This is precisely why investors recession proof their portfolios with rental properties.
Meanwhile, investors have more opportunities to close deals during downturns. Foreclosure activity is on the riseproviding a lot of motivation for owners to sell your home in foreclosure rapidly.
Housing market corrections also lead to more homeownership upside down on their mortgage. Again, this creates opportunities for savvy investors who know how to work with banks on short sales.
In short, real estate downturns offer many benefits to long-term investors.
Long term real estate crowdfunding
Many real estate crowdfunding platforms own multi-family homes, which earn their money from rents. The same logic therefore applies to their purchase as to the purchase of long-term rental properties: property prices may fall, but rents generally remain stable.
If you’re worried about a residential housing correction but not an economic recession, you can also buy crowdfunding investments that own commercial real estate.
Real estate crowdfunding has its own pros and cons, but can make it easier and more passive alternative to buying rental property.
Most Real Estate Investors Have Never Considered Buying self-storage facilities. This is precisely why it represents such a good investment.
Storage facilities offer high yields and few headaches. You don’t have to worry about complex, tenant-friendly eviction laws. You also don’t have to worry about complicated building maintenance, repairs or capital expenditures. They are simple structures with no plumbing, minimal electrical wiring, and often no HVAC.
Even better, many industry experts consider self-storage units to be “recession-proof.” Why? Because during recessions, people tend to downsize or temporarily move in with friends or family. And when they do, they need a place to put their stuff.
Mobile homes and mobile home parks
Many real estate investors turn their noses up at mobile homes, dismissing them with phrases such as “trailer trash.” Like self-storage facilities, lack of interest is the cause of strong returns from those who deign to buy them.
Mobile homes today can be surprisingly high-end, or at least mid-range. And every day the line becomes more blurred between mobile homes and prefabricated houses.
Also, when recessions hit, people tend to move into lower cost housing. Housing such as mobile homes.
Of course, you don’t have to buy a single mobile home and call it a day. Some investors prefer to buy entire mobile home parks, either by leasing land to people with their own mobile homes or by also buying and renting mobile homes on the land.
Mobile homes and mobile home parks offer another way of diversify your real estate portfolio and hedge against recessions.
What to Avoid During Housing Fixes
Of course, not all real estate investments do well during housing corrections. So what should you avoid?
First of all, be careful not to overleverage yourself on real estate investments. Avoid the temptation to put the minimum down payment on an investment property possible when buying properties. Deposit at least 20% and don’t use gimmicks or tricks like borrowing the down payment on business lines of credit. This gives you more flexibility to sell in an emergency, even if property prices drop.
Speaking of selling, all but the most seasoned investors should avoid return houses in times of real estate crisis. You just can’t believe today’s market prices will be the same six months from now when you’ve completed the renovations and are ready to sell. If house prices drop 10%, it could wipe out your entire profit margin and leave you in the red. And while 10% corrections in the housing market are rare, even a slight drop of 3-5% and a slowdown in home sales can leave you carrying property for months longer than expected, eroding your profit margin.
Overview in a downturn
Investors can still make money during real estate corrections. But that usually means taking a long-term view.
Look to buy properties at a discount during downturns and keep them as income properties for the foreseeable future. Once housing markets recover, you can re-evaluate your options.
Finally, create an additional buffer in your cash flow calculations. Even if rents don’t go down, vacancy rates can go up, so run the numbers with a higher vacancy rate than you currently expect in your given market.
G. Brian Davis is a real estate geek and co-founder of Sparks Rental.
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