Is Real Estate Recession-Proof?

The COVID-19 pandemic has led to an economic downturn that has real estate investors filled with uncertainty. With many sectors now under stress, the fear of recession is more a reality than speculation. In past recessions or financial hardships, real estate has fared better than other investments, which has led to some investment experts referring to the property as recession-proof. 

But is really real-estate recession-proof?

How does real estate as an investment fare during recessions?

Many investors will attest that real estate is a safe haven, even when the stock market is doing poorly. 

Out of the past five recessions, property prices actually increased in three, and investors who played smart were able to gain good returns. Residential real estate has been said to be the best recession-proof investment, as this is a long-term investment that isn’t rocked by short-term events. 

Why invest in residential real estate?

Residential real estate investments provide a service of putting a roof over a tenant’s head – and to quote Darren Robertson, the Northern Virginia Realtor, “Demand for housing is still high even in times of downturns.” If you’re still skeptical, here are other reasons why this type of investment is likely to give you good returns even during hard economic times.

1. Less sensitive to stock volatility

During past recessions, bonds and stocks faltered, but residential properties such as multi-family and single-family homes were a more reliable investment. Additionally, stock market volatility can affect the returns of your investment portfolio if the investments are tied to the swings of stock prices. Due to the steady nature of revenue from residential properties, this investment can be a good hedge against stock volatility.

2. Invest while property prices are low and expect capital growth 

Recessions are not good times for those hoping to sell their property. However, if you’re looking to buy or invest in rental property, now could be a good time. Although the value of your investment may remain low, the monthly or yearly income you get from the investment won’t change that much. Besides, you get to buy the property at a lower price, so once the recession is over, you will experience capital growth.

3. Demand for housing won’t wane in times of economic uncertainty 

Even during the current COVID-19 pandemic, people still need a place to live. Rental units are particularly in high demand as, during economic downturns, many people prefer to rent rather than to buy. Thus, while other investments may be hit hard during a recession, rental property will still be in high demand.

Multi-family homes

In past recessions, multi-family homes have been said to be the best recession-proof investments. After all, they give you multiple income streams and are cost-efficient as you get to divide your expenses over several units. However, COVID-19 has brought with it some circumstances that weren’t part of past recessions. With people expected to isolate in their homes, being cooped up in an apartment isn’t an enjoyable experience for most renters.

Apartments during this quarantine time seem less desirable as they have limited space and little room to get a breath of fresh air. This has improved renters’ desire for single-family homes as residents seek for more space and a backyard. 

Most people are afraid to invest now, but now is actually the time when most single-family property owners are willing to sell their homes at a reduced price based on the market. Other reasons to buy a single-family home include:

  • The rental demand and rents for single-family homes are likely to go up.
  • The interest rates have remained low at 3.88% over a 30 year fixed rate.
  • There is little competition, as most people are hesitant to invest in single-family properties.

How to find single-family homes for investment

The uncertainty brought by the coronavirus pandemic may make it difficult for you to find a suitable single-family home to invest in. However, this doesn’t mean that you should stop looking. 

To help you with your search, here are factors to consider when looking for the best single-family homes in the market.

  • Property Location – Location is everything in the residential property market. When choosing a single-family home, consider the areas desirable for tenants, like Oak Park near Chicago or Santa Monica in California
  • Wage growth – Wage growth refers to the percentage change in average salary on an annual basis. You should invest in an area where the wage is growing at a similar rate as the market appreciation rate or the rental rate.
  • Population growth – An area where the population is growing means that the demand for rental property is high. Look out for reasons why people would prefer to move to a given location such as affordable housing, job growth, or growth in the economy.
  • Rental yield – The rental yield depends on your rental income compared to the market value of the property.a
  • Rise in property value – It’s best to invest in areas where properties appreciate. The rise in property value is determined by the annual change in the location’s median home value.
  • Unemployment rate –A good market should have a low unemployment rate that is at or below the national unemployment rate.
  • Affordable housing –A market with affordable housing is right for you as an investor, as it means that the rent is also affordable for renters.

How to recession-proof your single-family investment

Once you buy your single-family home, you’ll need to ensure it gives you the best returns even during a recession. The best way to recession-proof your property is by:

  • Getting high net worth tenants that can pay several months in advance.
  • Signing long-term leases that will give you a steady flow of income
  • Keeping good tenants for longer by keeping your home in good shape and ensuring their needs are met.
  • Reducing water, heating, and water costs for your tenants during these hard economic times.

Economies have good times and bad times. A single-family home is an excellent recession-proof investment, especially now that renters are looking for more space. 

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