How Investors Should Approach a Real Estate Recession

From March 2020 to October of 2022, real estate prices skyrocketed a surprising 38%, GoBankingRates reports. But since then, they’ve seen a dip. Experts predict another drop on the way—one that could be the second-largest recession of the post-WWII era. 

So what’s wise for your money right now? Should you invest during a recession? Today we’ll ask—and answer—the top five questions about investing in real estate during a recession. We’ll also highlight a few things to watch for in the current real estate market and some examples of where your money will most likely be safe. 

What is a Real Estate Recession?

Poor economic conditions could mean there are fewer homebuyers with the ability to purchase a home or invest during a recession. According to Forbes, a real estate recession occurs “when home sales decline for six months straight, driven by two main forces: increasing interest rates and increasing construction costs.”

5 Frequently-Asked Questions About Buying Real Estate During a Recession

In typical times, real estate investments a pretty safe bet. But everyone’s on guard when investing during a recession, being a little more cautious and asking more questions. Let’s narrow it down to the top five. 

1. What Will Be Profitable Quickly? 

With market prices falling,  the resale of a property may not be profitable in the near future, so you’ll want to look for smaller, short-term gains. Search for ways to profit from the property you already own or to invest with less upfront capital, potentially through real estate stock options. 

2. Are There Any Tax Advantages?

Savvy real estate investors take advantage of available tax breaks. You may want to spend a few minutes learning where to find a few bucks when filing, so you don’t leave money on the table this tax season. 

3. Is There A Way To Reduce Risk?

Many real estate investors—especially those newer to the game—fall prey to problems such as poor planning, unclear goals, and inadequate market research. These factors, plus poor property management, continue to contribute to nonexistent or negative profit margins for a certain percentage of real estate investors. Fortunately, there are ways to reduce your rental property investment risks.

4. Am I Overextending? 

It’s never wise to overextend yourself financially; investing during a recession is no exception. It is wise, however, to make sure you’re achieving the highest possible profit margin from real estate in which you’re already invested. 

5. How Secure Is My Job? 

Investing during a real estate recession requires you to be realistic. Hope for the best, but prepare for the worst. Ask yourself how stable your household’s employment is and if there are whispers of layoffs at your company. 

As mentioned, now is not the time to be caught underwater with a mortgage you can’t afford. Make sure you have the means to invest in property now and that you’re confident that your income will be stable in the years ahead.

5 Things to Watch For When Investing During a Real Estate Recession 

When on the hunt for your recession-proof real estate investment, keep an eye out for these five indicators of a good bet. 

1. Low Maintenance

Investments that don’t demand a lot of hands-on maintenance are ideal. You don’t want to be caught with a high maintenance bill, especially if it’s easily avoidable. 

2. Low Bar to Entry

Those who don’t have much cash to invest upfront should look for real estate opportunities with low entry barriers where capital is concerned. Believe it or not, there are real estate investment opportunities that allow you to sidestep the bank’s climbing interest rates. 

3. High Probability of Profitability

You’d like your property profitable. To ensure you’re getting the most out of your property investment, keep an eye on real estate trends for 2023 and invest in tenant-attracting amenities. When considering new real estate investments, focus on those with proven track records of profitability. 

4. Quick Payout

Timing of payments is also essential. The sooner your investment sees a profit, the easier you can rest. Even better, once you collect regular tenant checks, you may find opportunities to expand your real estate investments. 

5. Location

Location has always been a critical factor when considering real estate, but in a recession, it’s more important. It can be advantageous to partner with a local expert, even if you’re native to the area, to identify the best area to invest in, given current market conditions. 

Types of Rental Property Investments

Let’s look at a few real estate property types most conducive to recession investing:

• Multifamily. A multi-unit building such as an apartment building or duplex.
• Single-Family. A freestanding house, townhouse, or condominium intended to house a one-family unit. 
• Commercial Property. Property zoned for commercial use rather than residential. 
• Inherited Property. It could be any of the above and often has the inheritor asking unexpected questions.

So, what can we do with this information? Let’s test a few common real estate ventures against our new knowledge to see if they make a good investment in a recession. 

Remember that it’s almost always a good idea to vet your plan with an investment professional before committing to any action.

While still a fun way to spend Saturday afternoons, flipping houses (single-family or multifamily) requires much upfront time and costs before you can profit. Plus, with interest rates climbing, it’s not the best time to take out a large loan.  

We don’t recommend purchasing a fixer-upper as a resilient investment during a recession. 

On the other hand, stocks such as REITs and real estate crowdfunding offer many benefits of investing without the burdens of ownership. You can also invest in real estate stocks or exchange-traded funds (ETFs) without buying property outright. 

With its low bar to entry and virtually non-existent maintenance, it makes for a good place for any spare change or a regular deposit for your automated investing app, like Stash or Acorns. 

The recent return to tiny living with the “tiny home” craze presents a low bar to entry, with tiny mortgages as a part of the deal. It also has lower maintenance and offers a quick payout potential as a short-term rental property.  If that approach appeals to you, these properties can be profitable with the right strategy.

A well-located condo can also make a great investment. People always need affordable places to live, and if the building has an HOA, chances are they’ll cover some property management tasks, which can take a lot off a property owner’s immediate to-do list. All said, another viable option during a recession.

Finally, while an apartment or multifamily unit offers a lot of profitability potential, it can also be extremely high maintenance—not precisely what the recession called for. 

Whether you’re considering investing in real estate or accidentally find yourself a property owner, keep in mind there are a lot of unknown factors in today’s economy. 

It might be time to partner with a professional property manager if you’re ready to see high profitability alongside low vacancy rates. A property management professional can use their expertise to help you find the right investment and will protect and grow that investment for you, regardless of what the economy has in store.