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. 

Housing market corrections also lead to more homeowners upside-down on their mortgage. Again, that creates opportunities for savvy investors who know how to work with banks on short sales

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

Self-storage facilities

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. 

Today’s mobile homes can be surprisingly upscale, or at least mid-market. And every day the line gets blurrier between mobile homes and manufactured homes

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.

Get Inman’s Property Portfolio Newsletter delivered right to your inbox. A weekly roundup of news that real estate investors need to stay on top, delivered every Tuesday. Click here to subscribe.

rentals | technology
Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×