Recession Talk Is Growing — Is It A Bad Time To Invest In Real Estate?
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Julien is a successful real estate investor, coach, broker and founder of HomeFluent, a technology-driven real estate company
One of the questions I’ve been receiving the most often over the last year is, “Is now a good time to invest in real estate with all this talk of recession and housing downturn? Not to mention the market crashing and the real estate bubble busting!”
With everything happening in the world right now, from trade wars to Brexit and everything in between, it’s no wonder that investors and potential homebuyers are worried and want to avoid making a costly mistake more than ever.
What’s even more frustrating is that no one seems to agree or give a straight answer. Will there actually be a recession or not? Are we on the brink of a recession or a few years in waiting? Will it be short in duration or a long-term dilemma? Will it be a vast or a minor one? And more importantly, will it make real estate prices drop or not?
So, what should you do?
The first thing to realize is that a recession is always coming. Anyone who owns their home or invests in rental properties will weather any number of recessions over many years. For the past four years, I have been frequently hearing that the sky will fall and that the market could crash at any moment. This could have easily paralyzed me and stopped me from investing. However, it also would have stopped me and dozens of other investors from realizing the amazing gains that are entirely tangible over this period.
There are opportunities and deals to be had in every market. Successful investors who know how to work a recession never sit on the sidelines, but rather know how to recognize those opportunities.
How could this next recession impact you?
When I talk to people about their fear of a recession, what they’re most concerned about is for real estate prices to drop as significantly as they did in 2008. Canadian investors in particular are expressing concern about seeing more price drops, as was recently experienced in Vancouver.
In my opinion, that’s unlikely to happen. In 2008, real estate prices dropped significantly not as a result of the recession, but because the housing collapse is what caused the recession in the first place. Real estate performed relatively well in prior recessions.
In addition, market statistics are usually comprised of the entire country or an entire province or state. But when investing in real estate, investors are only concerned about what happens in a specific city, to a specific property type, in a specific neighborhood. In other words, when in a recession, not every property gets impacted equally. So, when investing in rental properties, a drop in property value usually does not have a big impact on rental rates.
Also consider where else you may be investing your money if you decide that investing in real estate might be too risky. Investing in the stock market is often riskier, with a much lower payoff. Keeping the money in a checking account won’t protect it against inflation. Buying low-risk mutual funds and bonds might be a good strategy for some of your portfolio, but it could make you miss out on big opportunities. Since no one knows when a recession will be coming with certainty, you must make smart decisions while considering the impact they will have. While precise market timing may be impossible, there are a few ways you can prepare.
Nine Ways To Beat The Recession
Here are nine strategies and things to remember to help investors win in the next recession:
1. Fundamentals are always important. You’ve probably heard that investors make money when buying, not when selling, the property, and that’s especially important when there’s economic uncertainty. A great deal at the top of the market cycle will protect your investment if and when a market correction happens.
2. Having goals and a long-term strategy will help you weather multiple recessions and reduce your risk significantly. Focus on the bigger picture.
3. In real estate, cash flow is king. A property that cash flows today is likely to cash flow during a recession. Even if on paper the value of your investment properties drops, if they cash flow positively, you’ll emerge from the recession a happy investor.
4. Buy quality properties in high-demand areas. I don’t believe in recession-proof properties, but good properties in great locations will do better in a potential market downturn.
5. Always analyze properties, and only buy at prices that make sense.
6. Keep healthy cash reserves and don’t overleverage yourself.
7. Don’t panic and sell at the bottom of the market. Even if prices drop, they will recover. Economic cycles make property values go up and down, but over time, real estate historically always goes up.
8. Make a recession an opportunity. It may be possible to score a great deal on an investment property.
9. Always be ready. Opportunity can knock at any moment!
So, is it a bad time to invest in real estate?
If you buy the right property, at the right price, in the right area, I believe your investment will perform very well — even when a recession strikes. Because it will strike, but you will be expecting it. And you will be ready.