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Facing A Recession, Are Rental Properties Still A Sound Investment?
Across the US, anxieties are growing about a potential recession and with these financial concerns come additional worries about investment opportunities. How should investors protect their money if the economy goes into decline? While those investing in the stock market are being advised not to panic sell until we have better economic predictions, for those considering their real estate investments, the question is less whether to buy or sell, but more often how to manage existing holdings.
A Different Sort Of Recession
One reason that anxiety about a recession is so high right now is that the last recession was such a serious one - it was called the Great Recession for a reason. Because of that, investors today are like those living immediately in the wake of the Great Depression; they’ve seen the worst and worry that they’ll have to live through it again. In reality, though, the likelihood of the next recession being anywhere near as bad is low, and housing is unlikely to be an issue. The current housing market is steady, but not experiencing a bubble, and mortgage rates are also well under control.
No, rather than an extreme recession that will topple the housing market, real estate is likely to experience no more than a moderate dip. As such, real estate investors are encouraged to slow down on any renovations and flips and instead focus on acquiring B- and C-Class rentals. These rentals are slightly less appealing and less expensive, perfect for stable tenants taking financial precautions during an economic downturn.
The Demand Economy
Another reason why a recession would be unlikely to significantly impact the housing market is that right now there’s high demand and low supply; rather than a market flooded with homes but no buyers, there’s a large number of buyers - mostly millennials who are finally settled into their careers - interested in the current supply of homes. That being said, some potential buyers may pull back from purchasing in the short term, opening up additional opportunities for real estate investors with flexible rentals.
Short-term rentals typically don’t fare well during a recession because they’re occupied by tourists, and travel slows down during these periods. However, those hoping to purchase property in the near term may be ready to move out of their old full-year lease so that they can move when the right opportunity arises. Real estate investors who want to increase tenancy rates might consider shifting to a short-term model, inviting tenants to use the space on their own timeline. People can feel a greater degree of insecurity when faced with an economic recession, so free them up from longer leases - it still means an occupied property, and therefore an income, for you.
A “Normal” Recession
Ultimately, most recessions don’t significantly impact the housing market; people need a place to live regardless of economic conditions. Instead, people will cut back on luxury spending, from haircuts and meals out to new cars and vacations. And while home sales themselves might slow some, that’s actually good news for real estate investors, unless they hope to offload their properties and get out of the business. For those staying put, though, a recession can actually be good news, moving more people into rentals and making them more likely to stay in their current accommodations, keeping occupancy rates high. It doesn’t make sense to move under conditions of uncertainty, even if the housing market is mostly stable.
Perhaps more than anything else, it’s what tenants don’t know about the impact of a recession on housing that benefits investors - their sense that things are uncertain keeps them tied to landlords they trust. That makes this the perfect time for investors to build their relationships with tenants and secure their loyalty going forward.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.