Weak job growth reported in early September is the latest data pointing to a softening economy.
Does that mean you should stop investing? Will housing markets crash? Does a recession loom just over the horizon?
Slow your roll there, killer. I personally continue investing $5,000 in passive real estate investments every month through a co-investing club. Here’s the case for why other investors should consider continuing to invest too, even in a weakening economy.
Lower Interest Rates
In a weakening economy, the Federal Reserve’s first go-to move is cutting interest rates. That spurs borrowing, which spurs spending, which spurs economic growth.
Lower loan rates also make it easier for real estate investments to cash flow, with debt service costing less each month.
While the Fed doesn’t directly control mortgage rates, they do have an indirect impact on them. Beyond cutting the federal funds rate, they can also buy up more Treasury bonds and mortgage-backed securities, which would also likely push down mortgage rates.
Less Competition
Softer economies cause many would-be homebuyers and investors to pull back. For those who keep buying, that means less competition.
Less competition means fewer bidding wars, longer listing periods, and often the luxury of more time for due diligence before putting properties under contract.
Oh, and it also means buyers can see more success with lowball offers, to identify motivated sellers. If these sellers aren’t getting any other bites, they’re more likely to take your offer.
Discounted Prices
Fewer buyers in the field mean dipping property prices in some markets. In others, it means flat prices, and in still-appreciating markets, it means slower price growth than lower interest rates would usually cause.
In other words, buyers can score bargains.
Don’t you wish you could have bought properties at the fire-sale prices of the Great Recession? I certainly do.
But you have to remember that at the moment, it feels scary to buy when the economy struggles. The headlines all ring alarm bells, overall sentiment is low, no one has anything positive to say about real estate markets (or any other market) in a downturn. It takes courage to invest while everyone stands around on the sidelines chewing their fingernails.
That’s precisely why fortune favors the bold.
Less New Supply Added
In slower economies, real estate developers also slow down—by a lot.
Granted, it takes time for this to play out. New construction projects often take years. But in the grand scheme, this means less housing and commercial supply in the years to come. That in turn boosts the likely returns on any real estate investments you make today.
By the time builder confidence recovers and they start pulling permits again, that too will take years to come to fruition.
Some Real Estate Investments Resist Recessions
Not every real estate investment is recession-resilient (I’m looking at you, luxury homes). But plenty of them are.
I often hear the argument that B-class multifamily properties are recession-resilient, as C-class renters move up to B properties in strong economies and A-class renters move down to B properties in weaker economies. I don’t disagree with that logic. But recession resilience among some properties goes even deeper.
In the co-investing club, we’ve invested in several multifamily properties with property tax abatements this year. To get the property tax breaks, the operators set aside some or all of the units for affordable housing with income-driven rent caps. The operator instantly boosts the property’s NOI (and value) without spending a penny on renovations, and in a recession, the units become even more coveted.
We’ve also invested in mobile home parks with tenant-owned homes. If a recession forces a renter to choose between paying $500 for lot rent or $5,000 to move their home, which do you think they’ll choose?
Consider these just a few examples of recession-resilient real estate investments.
Don’t Try to Time the Market
I’ve said it before, and I’ll say it again: Trying to time the market is a fool’s game. Stop deluding yourself that you’ll outsmart every other investor out there, and just start dollar-cost averaging your real estate investments.
Every time I thought I’d get clever and try to time the market, picking the next hot city or the next hot asset class, the universe served me up a warm slice of humble pie.
Nowadays, I invest slowly and steadily every single month, going in on passive investments alongside other investors. We vet the deals together, too, on the premise that 50 sets of eyeballs evaluating a deal will create a much clearer picture of risks and rewards than going it alone.
Besides, surging real estate markets and economies aren’t all rainbows and butterflies for investors, either. Remember how great real estate looked in 2007? Investors sang a different tune just a year later.
Stop trying to outsmart the market, and instead invest small amounts every month in new deals, new cities, new property types. The law of averages will protect you in the long run, and in the short run, you can enjoy passive income from rents and distributions while everyone runs around screaming that the sky is falling.
