As an economic downturn looms on the horizon, I find myself answering a lot of questions about recession-proof real estate investments.
As investors, our job is to anticipate the future. We make choices today to prepare for the ups and downs of tomorrow.
The daunting shadow of a recession can leave even the most level-headed investor itching to overcompensate. Even understanding where we are and where we are going is complicated. By some indicators, we are in a recession already.
My advice boils down to this:
Stay the course!
Now is NOT the time to sell off everything or overburden your portfolio with risky real estate. By making some wise decisions now, we can weather a recession — and even thrive!
Here is how I advise the investors I work with to create a recession-proof strategy.
Avoid the hype
While the real estate market is beginning to cool, there are still plenty of over-priced options on the market. The frenzied growth of the last year has conditioned investors to buy now and ask questions later.
The impulse is certainly understandable. I have been operating in overdrive myself.
However, now is the time to pause before pulling the trigger. Invest some time in research. Develop a measured investment strategy. Set investment goals for the near future — and for 20 years from now.
Start thinking about your long game. It is no longer wise to assume that any tantalizing property will reap a quick profit because market values will continue to rise at unprecedented rates.
Sure, prices in growing markets like South Florida may continue to climb for weeks and even months to come. However, since properties with less inflated prices exist, let me help you find them!
Temper your expectations of the real estate market growth now to avoid an underwater property later.
Whoops. Too Late?
If you have already invested in some overinflated properties, now would be a great time to sell. It would be better to take a slight loss now than suffer a huge hit in the middle of a recession.
Plus, with the extra capital, you can begin to seek out some truly recession-proof investments.
What should you look for? Well, I am glad you asked…
Invest in a property that can grow in value
In the frenzy of the last year, turnkey properties have been the investment focus. The houses that sold the fastest were ones that could be turned around quickly to migrating homeowners, who were clamoring just to find a place to live.” And they sold at much higher prices than they were probably worth.
Why? Because market growth meant that:
Any Property Value + High Market Growth = High Profit
As the recession takes hold, we can expect real estate prices to slow. That means that the same model will not work because one big factor has changed:
Property Value + Minimal Market Growth = Minimal Profit
Investors will need to add something new to the equation to reap the same reward:
Property Value + Minimal Market Growth + Additional Value = Higher Profit
However, turnkey properties represent an investment at its maximum potential. The kitchen is already remodeled. The bathroom is already upgraded. The floor plan already has an ideal layout to appeal to most renters or buyers.
Turnkey properties will not offer the same value during a recession because you cannot add more value to them. Properties that need no improvements cannot turn a high profit in a real estate market that struggles to grow.
As you look for recession-proof investments, consider how you could increase a property’s value.
- Would a simple upgrade to the kitchen make a home instantly more appealing?
- Would improving the drab landscaping of a duplex make it easier to rent out?
- Could you remodel a simple house near the beach into a swanky vacation rental?
The investors who will make money during a recession will be the ones who create their own high profit margins, rather than relying on what the market offers by default.
Invest in a location with high growth potential
Some cities will be more recession-proof than others. That is just a fact. How do you know which cities will fare best when the economy takes a dip?
One key is a diverse job market that will continue to attract and retain talent. Smaller towns that are heavily dependent on one type of industry could offer more risk for real estate investments.
You also can expect that some industries, like tourism, will take a hit if most people cut back on their expenses. That is why South Florida, and especially Miami, invested so heavily into growing its technology industry over the last several years.
Another factor in a recession-proof town is its investment in infrastructure. A reliable public transportation system can keep a struggling family mobile and resilient despite shifting circumstances.
Of course, our economy becomes more and more favorable to remote work every day. That means cities with reliable Internet access and plenty of weekend amenities will attract those who reject a daily commute.
Provide excellent service
My final advice may surprise you. However, I firmly believe that service is an overlooked asset in creating recession-proof real estate investments.
Whether you are renting out your properties or reselling them, great testimonials and word-of-mouth referrals will give your business resilience in the face of a recession. Great service will help your investments stand out against the competition.
Many investors think that passive income like real estate investments removes any obligation of service from the investor. While we strive to keep investments hassle-free, there are still some key strategies investors need to implement up front to ensure smooth transactions.
Hire the right people
A good property manager, the right marketing strategy, reputable contractors and quality repair companies are key to making sure your renters or buyers have a smooth experience.
Prioritize quality over speed
Of course, we all want our investments to earn money as soon as possible. However, keep in mind that real estate is a long-term strategy. It is far better to invest some time and money on the front end and reap the higher profits for a longer period of time.
Ready to find your own recession-proof real estate? Royal Empire Realty grows investment Empires!
Our team of local Realtors provide great service and knowledgeable intel on the South Florida market. Contact us today for a free consultation.
Let’s find a recession-proof investment together.