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3 Reasons to Invest In Real Estate During a Recession (long read)

The coronavirus has created an economic storm that is putting stress on several business sectors ranging from transportation to hospitality and agriculture. But an economic slowdown may be a reason to buy real estate since this investment speaks to a variety of investor needs, including diversification and income generation. So it is important to understand the value of property investments in a portfolio during a recession.

"Real estate is an interesting asset," says Mihal Gartenberg, an agent at New York-based Warburg Realty Partnership. "When the stock market is doing poorly, investors who are looking for other opportunities find that real estate is a safe haven."

Gartenberg says incorrect assumptions about real estate prices and recessionary environments can keep investors from pursuing a property investment, whether it is a real estate investment trust, known as a REIT, or buying rental properties.

"The fact that the last recession was caused by the real estate bubble has remained strong in investors' minds, making them think that recessions lead to depressed real estate prices," she says. "Even though during three of the last five recessions, real estate values actually increased."

A recession can be the best time to invest in real estate, says Jim Egan, head of commercial real estate banking and senior vice president at Bryn Mawr Trust.

"An investment in a real estate investment trust is also an option that involves less capital and may add diversification to your portfolio." Egan says.

Still not sold on real estate investing? Here is a look at the merits of investing in property when the stock market moves into a sluggish cycle:

-- Property investments can produce stable income.

-- Real estate may be less sensitive to volatility.

-- Property may outperform stocks and bonds.

Property Investments Can Produce Stable Income

One of the chief reasons to consider making property investments is the opportunity to generate income. REITs can provide dividend income; direct ownership allows investors to pocket rental income.

As an income stream, real estate investing tends to offer predictability in a recession.

"Consistency of the yield is what makes real estate investments more suited for riding out a recession," says Jason Laux, owner and retirement advisor at Synergy Group in White Oak, Pennsylvania.

Laux looks to rental properties, saying consistent rent payments from tenants do not fluctuate in a recessionary period.

"Their monthly rent payment is always due and is not tied to the stock market," he says.

Real estate investors have another edge when it comes to using rental income to offset the effects of a recession.

Laux says they are in a position to hedge against inflation and changing interest rates when they have control over rental prices. Raising the rent at lease renewals, for instance, allows investors to keep up with rising prices associated with inflation.

In that respect, this asset class can offer more flexibility than stocks and bonds in a recession, Laux says.

Real Estate May Be Less Sensitive to Volatility

Stock market volatility can add to an investor's recession woes if stock prices are making wide swings. That can directly affect the return profile of a portfolio. Real estate's relative low correlation to stock market movements, on the other hand, can make it a more reliable choice during a recession.

"Because of the steady nature of revenues from real estate, it can often be a good hedge against volatility," says Diana Hill, director of real estate education at OTA Real Estate. "Even in times of recession, people need places to live, work and get services. So the market will always exist."

Hill says that one of the hallmarks of real estate investing is its slower-to-move nature.

"Value on paper may change, but value, as it relates to the yearly income, doesn't tend to vary as quickly," she says.

The real estate market is not completely immune to volatility, Egan says.

The 2008 financial crisis and the following downturn in the housing market are evidence of that. But managing volatility risk is all about strategy when investing in real estate in an economic downturn.

During the Great Recession, real estate investment properties were affected differently.

"Homeowners lost significantly, yet single-family rental assets were actually positive as a sector," says Quinn Palomino, principal at Virtua Partners in Scottsdale, Arizona. "Other assets such as storage and multifamily, have historically tended to be more durable in a downturn."

At the same time, industrial, retail and office space may prove riskier in a recession because the cash flow of those properties is dependent upon how well the underlying tenants can navigate a slower economy.

Property May Outperform Stocks and Bonds

Past performance is not a guarantee of future performance -- that is one of the oldest investing rules. But real estate could prove profitable when the economy moves toward a recession if stocks and bonds falter.

"Historically, there are a range of potential outcomes when it comes to performance during a recession," Palomino says. For example, retail commercial space may present more downside risk compared with multifamily housing and apartment buildings.

An investor's success with real estate in a recession depends largely on their strategy.

"If your investment model is dependent on appreciation, then the recession is going to be a tough time, as home prices are going to drop," says Joseph Polakovic, owner and CEO of Castle West Financial in San Diego. "A model built solely on investing for high-cash returns may not fare any better in that the best opportunities for high cash-on-cash returns tend to be worse neighborhoods."

The sweet spot, says Polakovic, is somewhere in the middle: a property investment with good neighborhoods and good jobs.

The quality of the property investment can directly dictate how well real estate performs in comparison to other securities.

"Real estate tends to be a better hedge for inflation than bonds, especially in this low-interest-rate environment," he says.

In short, a recession can open up opportunities to invest in real estate. Investing wisely means managing the balance between supply and demand. When supply is high and demand low, it is possible to purchase property at deep discounts, Hill says.

Investors can position those properties as rentals or rent-to-own until the needle shifts back to low supply and high demand. At that point, the property can be sold for a profit. When evaluating properties, focus on quality and return potential, as well as the time frame involved.

"As an investor, you have to be comfortable with the long-term nature of this investment and understand the liquidity risk associated with real estate," Laux says.

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7 Investment Strategies to Follow During a Crisis

Given the extraordinary global circumstances, many investors are now fearing that another recession is afoot. It makes sense, as recessions are often the result of an abrupt drop in spending, although most causes of recessions cannot be predicted in advance.

Before such a circumstance is certain, it’s a good idea to plan ahead and decide on your investment strategy now. A recession doesn’t have to mean that all investments should be put on hold; it just means that different industries and types of companies and investments are safer than others. Here are some quick tips to keep in mind.

1. Low-risk investments only
A recession is not the time to experiment or take risks with your investments. The most important aspect of anyone’s recession-time investment strategy should be playing it safe. This involves avoiding investments in companies that are highly leveraged or speculative. Focus on finding companies with good cash flow and low debt for the safest investment options. And as a general guideline, try not to take any major risks at an already uncertain time.

2. Investing in consumer staples in the equity market
When looking for safe investment options in the equity market — in accordance with the previous point — it’s a good idea to focus on consumer staples, or essential items that people will need (and buy) regardless of their financial situation. They typically include food, beverages — including alcohol — certain household goods and to***co.

3. Focus on non-cyclical, recession-resistant industries
Cyclical goods and services are best avoided during times of uncertainty. They’re the non-essential things that consumers will spend money on less regularly, perhaps influenced by time of year, current economic status of a typical household and a number of other factors.

During a recession, it’s best to focus on finding non-cyclical industries offering goods and services that are in constant, year-round demand. In addition to the consumer staples mentioned above, these recession-resistant industries include grocery stores, discount stores, alcohol manufacturers, cosmetics and funeral services.

4. Ensuring sufficient diversification
The old saying about not putting all your eggs in one basket comes to mind. A good general piece of investing advice is not to pile into a single sector, even when it includes the aforementioned consumer staples.

This is doubly important during as unpredictable a time as a recession. Diversifying across industries will protect you from greater losses if a particular product or industry loses value. Equally important is diversification across asset classes, e.g., equities, in addition to fixed income and commodities.

5. Investing in real estate
Though a major recession can bring serious loses to many industries, real estate — provided wise investments are made — is usually not among them. Recession usually leads to a drop in home values, meaning that you may be able to buy a property at a lower price and sell it for a large profit when prices rise back up after the economy and markets have recovered. In the meantime, you can rent the property out to a tenant, generating reliable passive income during the interim period.

6. Dividend stocks
Dividend stocks create a passive income. After investing in a company, you essentially receive a portion of the company’s earnings.

It’s generally recommended to look for companies that have low debt-to-equity ratios. Just to be completely on the safe side, you may want to focus only on fully reliable companies, i.e. those that have increased their dividend payouts for at least 25 consecutive years.

7. Precious metals
In the commodities market, gold in particular is widely known for retaining its value during periods of uncertainty and recession. Silver tends to perform fairly well during recessions, too, and precious metals in general are a relatively safe investment option.

Be well, and invest wisely.

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