Worried about a housing market correction wreaking havoc on your real estate investments?
Between high inflation, rising interest rates, recession fears, and a stumbling stock market, investors have plenty to worry about in 2022. We’re already seeing a housing correction in some markets, and pundits raising housing bubble concerns.
Where does that leave you as a real estate investor?
Consider these strategies for investing in real estate during housing downturns, without worrying about trying to catch a falling knife.
Residential income properties
While home prices sometimes dip during recessions, rents rarely do. At worst, they level off for a year or two, like they did during the Great Recession. The consensus among economists is that rents will continue rising throughout 2022.
So, your rental cash flow calculations won’t change, even during a recession or housing correction. Even if your investment property dips in value, your rental income won’t drop, so you can continue holding and earning cash flow while you sit out the storm. It’s precisely why investors recession-proof their portfolios with rental properties.
Meanwhile, investors get more opportunities to score bargain deals during downturns. Foreclosure activity is on the rise, providing plenty of motivation for homeowners to sell their house in foreclosure quickly.
In short, housing downturns offer plenty upside for long-term buy-and-hold investors.
Long-term real estate crowdfunding
Many real estate crowdfunding platforms own multifamily housing, which earns its money on rents. So the same logic applies to buying them as buying long-term rental properties: property prices might dip, but rents typically remain stable.
If you worry about a residential housing correction but not an economic recession, you can also buy crowdfunding investments that own commercial real estate.
Real estate crowdfunding comes with its own pros and cons, but can make an easier, more passive alternative to buying rental properties.
Most real estate investors have never considered buying self-storage facilities. Which is precisely why it makes such a great investment.
Storage facilities come with high yields and few headaches. You don’t have to worry about complex, tenant-friendly eviction laws. Nor do you have to worry about complicated building maintenance, repairs, or capital expenditures. These are simple structures with no plumbing, minimal electrical wiring, and often no HVAC.
Best of all, many industry experts consider self-storage units “recession-proof.” Why? Because during recessions, people tend to downsize, or to move in with friends or family temporarily. And when they do, they need a place to store their belongings.
Mobile homes and mobile home parks
Many real estate investors lift their noses at mobile homes, dismissing them with phrases like “trailer trash.” Like self-storage facilities, the lack of interest is what drives the strong returns among those who deign to buy them.
Besides, when recessions hit, people tend to move into lower-cost housing. Housing just like mobile homes.
Of course, you don’t have to buy a single mobile home and call it a day. Some investors prefer buying entire mobile home parks, either renting out lots to people with their own mobile homes, or buying and renting mobile homes on the lots as well.
Mobile homes and mobile home parks offer one more way to diversify your real estate portfolio and hedge against recessions.
What to avoid during housing corrections
Not every real estate investment does well during housing corrections of course. So what should you avoid?
First, watch out for over-leveraging yourself on real estate investments. Avoid the temptation to put the minimum investment property down payment possible when buying properties. Put down at least 20 percent, and don’t use gimmicks or tricks like borrowing the down payment on business credit lines. That leaves you more flexibility to sell in an emergency, even if property prices dip.
Speaking of selling, all but the most seasoned investors should avoid flipping houses during real estate downturns. You simply can’t trust that today’s market pricing will be the same in six months from now when you’ve completed renovations and are ready to sell. If home prices drop 10 percent, that could wipe out your entire profit margin and leave you in the red. And while 10 percent housing market corrections are rare, even a mild 3-5 percent drop and slowdown in home sales can leave you carrying the property for months longer than expected, eating away at your profit margin.
The big picture in downturns
Investors can still make money during real estate corrections. But it usually means taking the long view.
Look to buy properties at a discount during downturns, and hold them as income properties for the foreseeable future. Once housing markets pick up steam again, you can reassess your options.
Lastly, build some extra buffer into your cash flow calculations. Even if rents don’t fall, vacancy rates might climb, so run the numbers with a higher vacancy rate than you currently expect in your given market.
G. Brian Davis is a real estate geek and co-founder of Spark Rental.