Rental properties are the best investments for many reasons. For starters, they generate rental income every month, yielding a high return on investment for real estate investors. Investors who own rental properties also benefit from tax deductions as well as appreciation, or an increase in house prices and values. Above all, rental real estate investments are excellent, low-risk investments. Even during a downturn in the economy, such as a recession, investors can continue to profit from rental properties. Wondering how you too can earn a profit during a recession? In this guide to recession proof real estate investing, we’ll tell you!
What Is a Recession?
Before we walk you through recession proof real estate investing, we need to define what a recession is. The National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee sets the US standard of a recession. The NBER considers different factors for the definition, such as inflation-adjusted GDP, income, employment, and industrial product. In a nutshell, a recession is a period when economic output contracts for two consecutive quarters. It is a period between an economic peak and a trough. Essentially, a recession is the opposite of expansion. Recessions are one of the phases of the economic cycle for large-scale economies. Still, they can contribute to a severe downturn depending on duration and severity.
Related: What to Invest in During a Recession? Real Estate
The Coronavirus Pandemic and a Recession
With the COVID-19 pandemic ravaging the United States, the nearly 11-year US economic expansion has come to an end. According to the NBER, the US is officially in a recession. Still, this current recession is considerably different than the 2008 subprime mortgage crisis. Firstly, Americans are, on average, less in debt than they were then. There is also an increase in mortgage refinancing that has provided more cash to consumers. Nonetheless, it is impossible to know the exact duration and effects of the coronavirus-led recession. Only time will tell.
A Guide to Recession Proof Real Estate Investing
Regardless if it is caused by a global pandemic or housing market crash, there are many steps you can take for surviving a recession. These 5 recession proof real estate investing methods will ensure you continue profiting during a recession.
1. Commit to a Buy and Hold Strategy
Selling real estate investments typically allows investors to quickly realize a return on their investment. During a recession and a real estate market shift, however, this is not the best idea. If you plan on selling an investment property, wait until the recession ends. Instead, commit to a buy and hold strategy. A buy and hold strategy is one of the best real estate investment strategies for recession proof real estate investing. If you’re holding onto an investment property and renting it out, you should be able to earn a monthly rental income. And with positive cash flow, you can cover your mortgage payments and investment expenses. This will keep your real estate business lucrative and stable during a recession.
Related: Why It’s Better to Buy and Hold Real Estate and Rent It Out
2. Use the Traditional Rental Strategy
You should run your rental properties as long-term rentals as opposed to Airbnbs. Generally, when people fall on hard economic times, they will be traveling less. So an Airbnb rental property may not generate as much rental income as it typically would. And in the recession of 2020, the pandemic caused enforced travel bans which essentially put Airbnbs out of commission. On the other hand, many traditional real estate properties were able to generate consistent rental income, and cash flow and enjoyed low turnover making them the ultimate property type for recession proof real estate investing.
Consider negotiating long-term lease agreements, a minimum of 6 months, with tenants. You might end up with lower rental rates, but it is vital to keep long-term tenants during a recession. You’ll expose yourself to more risk by having negative cash flow if a rental property becomes vacant.
3. Cut Costs for Tenants
As mentioned, having an occupied rental property is of the utmost importance during a recession. You can help keep your unit occupied by reducing costs for your tenants. Not only do tenants have to deal with monthly rent during a recession, but they may also have to pay for water, electricity, and heating bills, among others. These costs can eat up their income, which only makes a recession worse for them. As the landlord, consider finding ways to minimize these costs. Converting to solar panels, for example, can reduce utility costs. You can also install higher-grade windows, which lower heating bills.
Just be sure to focus on cost-saving renovations for recession proof real estate investing as opposed to unnecessary cosmetic renovations. And be sure you have the budget for any changes you plan on making. A recession is not the time to roll the dice and hope you get your return on investment in renovations.
4. Increase Tenant Retention
The rationale behind reducing costs for tenants is to maximize tenant retention. As implied earlier, you want to avoid vacancy costs during a recession. Not only that, but you may face competition from other landlords, who plan on lowering costs as well. Therefore, you need to do whatever you can to improve resident retention.
Be sure you have good tenants in place. A good tenant screening process will help with this. Also note that for recession proof real estate investing, you may have to find ways to help your tenants when it comes to paying the rent. For example, different rent payment plans for struggling tenants may ensure you get your rental income, even if it’s late or in installments. Consider talking to your tenant about using their security deposit to pay rent. These options may ultimately be better than having to evict a tenant or having them voluntarily leave to look for a cheaper rental property.
Related: The Best Tips to Boost Your Occupancy Rate for Better Tenant Retention
5. Explore Various Income Opportunities
Finally, consider finding new ways to increase rental income. For many investors, the first thing they will think about is increasing the property’s rental rate. However, this is not a good strategy for recession proof real estate investing. Instead, add new sources of income to your rental property by offering high-demand facilities and services. For example, consider coordinating housekeeping services, installing coin-operated machines, and providing dog-walking services. Also, look into expanding your real estate portfolio to include passive investments such as real estate crowdfunding projects and REITs.
The Bottom Line
There is no doubt that rental properties are good investments during a recession. By following this guide, you’ll be able to recession proof an investment property and continue profiting during an economic downturn.
If you really want to ensure you have the right properties for recession proof real estate investing, find them using tools like an investment property calculator and real estate heatmap. Learn more here.