The Big Picture On Buying Real Estate During a Recession:

    • Real estate, particularly rental properties, tends to be more stable during recessions compared to other investments. While home values may dip slightly, rents remain steady, and demand for rentals can even increase due to fewer people buying homes.
    • Rental property owners face risks like higher vacancy rates and rent defaults during recessions, but insurance options and strategic management can mitigate these issues.
    • Despite risks like eviction moratoriums, rental properties generally outperform stocks during recessions, offering more consistent returns and protection against economic downturns.
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recession-proof real estate investments

Rental properties offer better protection against recessions than most investments. But that doesn’t make them completely recession-proof.

As you look for ways to protect your portfolio from future recessions, here’s how rental properties have stacked up in past recessions.

 

Rents During Recessions

The good news for real estate investors is that rents don’t actually drop during recessions. People still need to live somewhere, regardless of how the gross domestic product changes.

In fact, recessions can even drive up demand for rental properties. Fewer people can afford to buy homes and become homeowners, after all.

Take a look at the Federal Reserve’s consumer price index for rents over the last 75 years:

In some cases, rents level off during recessions. Landlords have less pricing power to raise rents.

But in other recessions, rents keep chugging upward undaunted.

Regardless, rents don’t fall during recessions, removing the risk of collapsing rental cash flow.

 

Property Values During Recessions

On the other hand, home values sometimes dip when the economy falters.

Here’s how median home values have fared since the early 1960s:

Even so, they only fell significantly once in the last 60 years: during the Great Recession, which makes sense given that it was largely caused by a housing bubble in the first place.

In other recessions, property prices decreased by around 5%, and in some recessions, home values didn’t drop at all.

While real estate investors certainly can’t count on property values always going up, they’re far more stable than stocks and rarely drop by more than 5%.

And if you really want a recession-proof real estate investment, try self-storage facilities. During recessions, people tend to downsize, and many choose to rent a storage facility rather than get rid of their belongings that don’t fit in their new, smaller home. You don’t have to buy an entire self-storage property by yourself either — buy fractional ownership in a property by investing in a real estate syndication. In fact, we invest in these sorts of group real estate investments every month in our investment club.

Asset Performance Comparison During Economic Downturns

Let’s have a high-level overview of how various asset classes typically behave during recessions.

Asset Type

Typical Recession Performance

Volatility

Notable Characteristics

Residential Real Estate

Slight decline to stable

Low

More resilient than other assets

Commercial Real Estate

Moderate decline

Medium

Varies by sector and location

Stocks

Significant decline

High

Tends to recover quickly post-recession

Bonds

Slight increase

Low

Often viewed as a safe haven

Self-Storage Facilities

Stable to slight increase

Very Low

Benefits from downsizing trends

REITs

Moderate decline

Medium

Offers real estate exposure with liquidity

Vacant Land

Moderate decline

Low

Long-term hold, minimal ongoing costs

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Evictions & Vacancy Rates in Recessions

Landlords get in trouble during recessions with rent defaults, turnovers, evictions, and vacancies.

A shrinking economy means fewer jobs, which in turn means more renters without work. If tenants lose their jobs, they often stop paying the rent, and landlords must start the lengthy and expensive eviction process.

You can see this play out in rental vacancy rates jumping in recessions:

So, while rents may not collapse during recessions, landlords can still see their cash flow stutter.

If you see a recession looming on the horizon, consider buying rent default insurance. Or better yet, require your renters to pay for a policy as a condition for leasing to them. You can sweeten the deal for your tenants by combining it with a damage policy through The Guarantors so that your renters don’t have to put down a security deposit.

Those vacancy rates aren’t just caused by rent defaults and evictions, either. Recessions cause many renters who previously lived alone to move in with family, friends, or roommates. This “household bundling” effect reduces rent demand and increases rental vacancy rates.

 

Case Study: Rentals in the Great Recession

The Great Recession ranks among the worst in America’s history, second only to the Great Depression.

Given that it largely centers around overpriced real estate, it makes a great case study for a “worst-case scenario” for real estate investors.

Median home prices fell from a peak of $257,400 in the first quarter of 2007 to a trough of $208,400 in the first quarter of 2009. That represents a 19% drop in value, and in many cities, home prices fell by 30, 40, or even 50% or more. Keep in mind those are quarterly numbers, which round out the extremes.

Meanwhile, median US rents didn’t dip at all. They did flatten, however, in the aftermath and recovery from the Great Recession.

Rental vacancy rates did jump from 9.6% in the fourth quarter of 2007 to 11.1% in the third quarter of 2009. But that still only represents a bump of 1.5 percentage points — hardly a cause for panic. 

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Dangerous Precedent of Eviction Moratoriums

The coronavirus pandemic created a dangerous precedent in the form of eviction moratoriums. Tenant activists got a taste for making lease agreements only one-way enforceable, leaving tenants able to enforce their side but landlords unable to enforce theirs.

It may prove “politically expedient” to pull the same stunt again when the next recession comes. Landlords would again be strapped with non-paying tenants, forced to pay someone else to live for free.

It could happen nationwide or at the state and local levels. While you can’t protect against a federal eviction moratorium, you can avoid investing in tenant-friendly states with anti-landlord laws.

I certainly do — it’s one way I reduce risk in my real estate investments.

 

Stocks During Recessions

Stocks don’t fare so well during recessions.

Take a look at the jagged slopes of the S&P 500 in each recession for the last 90 years:

S&P 500 in recessions

Chart courtesy of Macrotrends.net

In the year leading up to a recession, the S&P 500 dropped an average of 3%. During recessions, it dropped another 1% on average. In the Great Recession, the S&P 500 dropped a dizzying 57% from peak to trough, of which 37% happened during the technical recession.

Here’s how the S&P 500 has performed before, during, and after each recession since the 1950s:

stock market during recessions

Chart courtesy of Darrow Wealth Management

The good news? Stocks nearly always boom in the aftermath of recessions, jumping an average of 16% in the year after recessions end.

I don’t avoid stocks before, during, or after recessions. Quite the contrary: US stocks earn an average historical return of around 10.5%, and they make up a large portion of my portfolio. Don’t think about whether to invest in real estate versus stocks, but rather how much of each you want in your investment portfolio.

Still, stocks are about as far from recession-proof as you can get.

 

Benefits of Buying Real Estate During a Recession

Of course, recessions can be challenging, but they’re essential for an economy to function, and they can also present opportunities for investors. 

    • Lower prices: As we saw in the Great Recession, property values can drop significantly during economic slumps. This creates a potential entry point for investors to acquire properties at discounted prices.
    • Reduced competition: Whether we like it or not, many buyers retreat from the market during recessions due to financial uncertainty or difficulty securing loans. Less competition for available properties and more negotiating power.
    • Favorable interest rates: Central banks often lower interest rates during recessions to stimulate economic activity. It’s common knowledge. This movement means more affordable mortgage terms, reduced long-term costs, and of course, better cash flow on rental properties.
    • Motivated sellers: During tough economic times, certain property owners may need to sell quickly due to financial pressures. This means better deals for buyers who are willing to act fast. The thought of it is a bit unpleasant and could make you feel like an opportunistic capitalist, but that’s just how it is.
    • Long-term appreciation potential: When you buy at lower prices during a recession, you benefit from substantial appreciation when the market inevitably recovers. It’s a basic principle. Buy when low, sell when high. Just remember the famous line of Kenneth Fisher, “Time in the market beats timing the market.”

Challenges When Buying Real Estate During Recession 

Getting into real estate during economic downturns is considered a high-risk, high-reward approach, if you ask me. So, it’s perfect for investors with that kind of risk appetite. But regardless of one’s willingness to take it, it’s 100% essential to be aware of the potential challenges they might face down the line. 

    • Stricter lending standards: Banks tighten their lending requirements during economic downturns. This can make it harder to secure financing, especially for investors with less-than-stellar credit or limited cash reserves.
    • Uncertain market conditions: Predicting the bottom of the market is challenging. Specifically, there is always a chance that property values will continue to decline after your purchase. 
    • Lesser rental demand: As discussed earlier, recessions can increase vacancy rates. What does it mean? This factor alone can impact your ability to find quality tenants or maintain desired rental rates.
    • Cash flow concerns: If you rely on rental income to cover mortgage payments (I hope not), any prolonged vacancies or rent defaults could strain your finances.
    • Maintenance and repair costs: Older or distressed properties bought at a discount may require significant renovations. And take note: the prices of these services will skyrocket during recessions.
    • Potential for further government intervention: As we saw with eviction moratoriums during the pandemic, there’s always a risk of new policies that could affect landlords’ profitability.

As someone who experienced multiple recessions during his career, here’s my takeaway: As with any investment, diversification and careful risk management should be prioritized.

Are Rental Properties Recession-Proof?

No investment is 100% recession-proof. However, rental properties perform better than most when the economy takes a nosedive.

Rents don’t fall at all. Home prices do sometimes correct downward, and rental vacancy rates can tick upward. If property values dip, that can remove one of your exit strategies if it puts you upside-down on your rental property mortgage.

Watch out for higher tenant turnover rates, rent default rates, and evictions when recessions hit. Buy rent default insurance to protect yourself against the risk of tenants not paying their rent.

Rental property owners remain mostly unscathed during recessions. But stay vigilant about rent defaults, avoid turnovers if possible, and consider rent freezes or other incentives to keep good tenants in place while the economy finds its footing.

 

What have your experiences been with rental properties during recessions?

 

 

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