How To Weather A Potential Recession As A Real Estate Investor In 2023

March 1, 2023

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While a recession is not a foregone conclusion, some signs point towards 2023 being the year that the US economy, and likely the world as a whole, is entering a recession. Economists worry that inflation, elevated interest rates, supply chain disruptions, and the conflict in Ukraine will put pressure on the economy, which could see the rise of a contracting economy. While extremely hard to predict, some economists, such as Nancy Lazar, chief global economist at Piper Sandler saying that the looming recession will feel more like the 1970s than a 2007 – 08 slump. In fact, the Federal Reserve’s staff economists have warned of a potential US recession this year. They fear that stocks and real estate prices are aggressively valued and could drop, for which we are starting to see signs in the housing market. As stated in the meeting minutes of the Fed’s February meeting, “the probability of the economy entering a recession in 2023 remained elevated”.

On the flip side, as reported by Yahoo! News, three of the five richest people are in the world are making plays in the Real Estate Market. Warren Buffet, Jeff Bezos, and Elon Musk have invested in the real estate market in some capacity, with Buffet’s Berkshire Hathaway taking a 7% stake in a homebuilding solutions company worth $417.1 million. This could signal Buffet seeing that the housing market has bottomed out, possibly anticipating growth in coming years.

Whether you’re an optimistic billionaire or a worried economist, it seems every day, new headlines are being released declaring a recession is just around the corner or that a recession in 2023 was fear-mongering at its finest. So if you’re not a billionaire or economist, what do you do? After seeing the downward trend in real estate marketing activity over the last few months, we here at REI News prescribe the adage: hope for the best but prepare for the worst. Should the economy bounce back after this cooling period, home prices aren’t shooting up drastically overnight, so you still have a chance to find a great deal. On the other hand, should the economy contract and the demand for real estate fall, you don’t want to be caught with your hands full with a property that has devalued significantly in a short period and may remain devalued for months or years to come.

So, in that spirit, we’ve compiled a list of things investors can do to prepare for the worst, a recession.

Table Of Content:

Focus On Cash Flow
Diversify Your Investments
Maintain Good Relationships With Tenants
Stay Up To Date
Have a Plan B
Team Up With Other Investors
Stick To Your Strategy

How To Survive A (Possible) Recession?

Focus On Cash Flow

During a recession, maintaining a positive cash flow becomes critical. Make sure any rental properties generate profits, adjust your rental prices, or reduce your operational expenses as necessary to ensure your cash flow remains positive. You may want to convert specific properties to short-term rentals, such as vacation or corporate housing, as they can generate higher profits if you can keep them occupied. Refinancing a property can be an excellent way to reduce your mortgage rates. However, you need to ensure your new interest rate and period are more attractive, which is difficult to do during a recession as interest rates are usually elevated. However, should you be seeking financing options, consider talking to our team at REI News now to allow our specialists to identify funding opportunities for you.

Diversify Your Investments

The worst thing you can do during a recession is to put all your eggs into one basket. It can be challenging to predict which industries or markets will face the worst of a recession and which ones may escape relatively unscathed. Some traditionally recession-resilient industries, such as health care, utilities, and consumer essentials, can be good investments to hedge against inflation and survive a potential recession. In the real estate market, you may want to consider investing in rental properties, REITs, or undervalued properties you may find, but know that you may be playing the long game and won’t be able to cash out for a long time if the recession drags on for long.

Get In Touch With The Real Estate Investor News Team If You Want To Know More About Buying And Financing Investment Properties

Maintain Good Relationships With Tenants

Ensuring vacancy rates low will ensure you have sufficient rental income to deal with inflation. You’ll want to keep tenants happy, so they renew their lease. Being flexible, providing incentives to stay, and attending promptly to maintenance requests can help maintain positive relationships with your tenants. Remember, everyone is going through a hard time during a recession, so some flexibility during tough times can go a long way.

Stay Up to Date

Staying current on market trends can help you make informed investment decisions and identify opportunities. An unfortunate outcome of recessions tends to be properties being sold in a distressed state, allowing you the potential to pick up prime property at undervalued prices. This will require some level of risk tolerance as investing during a recession, while possibly rewarding, can be wildly risky. Always keep your ear to the ground to stay informed on the latest developments in the real estate market, and be ready for any investments to be long-term ones, with recessions suppressing demand over time.

Have a Plan B

It’s hard to predict what will happen during an economic downturn. As such, it’s essential to have a contingency plan to be able to handle unforeseen events. This may be as simple as maintaining a financial buffer with savings so that you have an emergency stash if needed or having a plan to refinance properties to secure capital.

Team Up With Other Investors

You can help spread the risk of investments by partnering with other investors. Any profits of an investment will have to be shared, but that is a small price to pay to be able to spread the risk during an economic downturn. You can work together to find deals, share expenses, and leverage each other’s expertise to maximize opportunities.

Stick to Your Strategy

After you’ve figured out the strategy you want to follow, be patient and do not panic. Due to the uncertainty inherent during a recession, any minor adverse developments may give you a severe case of FOMO (fear of missing out) or fear you are about to take a significant loss. While either might be true, you must always refer to your overall strategy and determine whether the new developments warrant a change to your plan or not.

Conclusion

The above are some tips you can use to try and weather a possible recession. As mentioned earlier, uncertainty comes with the territory of an economic downturn, so no matter how much you prepare, you could still be thrown a curveball. Being open to flexibility while still working towards long-term goals will be key to successfully navigating these waters.

And should you be an opportunistic investor, spotting a deal that’s too good to pass up, you may be looking for affordable funding options. If so, you’re only one click away from finding it. Contact our specialists for the best financing opportunities in real estate investing.