Real estate investment during a recession

Recessions occur when there is a widespread decline in demand, which can be triggered by various events: a financial crisis, a decline in foreign trade, a sharp decrease in supply, the bursting of an economic bubble or a global natural disaster, such as a pandemic.

How do you enter a recession?

A recession occurs when a nation's economy experiences a contraction for more than six months. It is widely accepted that a country enters a recession if the economy contracts for two consecutive quarters.

What to buy in the event of a recession?

Investing in a savings account and safe haven assets, such as investments in gold, is a winning choice during a recession. Typically, higher interest rates enforced during a recession lead to higher than normal returns when depositing funds into a savings account.

Investing in real estate during an economic crisis: how and why to do it

Recessions and falling home prices are nothing new. The history of the real estate market has gone through several periods of economic recession. For example, house prices also took a hit during the Great Depression of 1929 and it was really not a good time to buy short-term properties for the next 10 years.

All recessions since then have averaged no more than 11 months. Many of them have involved falling stock prices, high interest rates, high unemployment rates and a loss of consumer confidence. But all crises have offered good times to buy real estate.

In recent months, an unprecedented global pandemic, the Coronavirus, also known as COVID-19, has shut down nearly every nation and financial system in the world. What started as an outbreak in some isolated regions of China has spread globally, growing exponentially.

The Coronavirus is bringing global financial markets to their knees, highlighting their risks and volatility. Economists and banks see what is coming as one of the deepest recessions in history, with a recovery only possible in 2021. No one probably ever feels prepared enough in turbulent markets like this.

Being an active investor means investing even when the market is in crisis and this is in fact the right time to do it with the right strategies and expert professionals. Successful investors use market results to sharpen their education and tools to prepare for the opportunities that the times, including the current one, may offer.

An economic slowdown can therefore be a valid reason to buy real estate as this investment addresses a variety of investor needs, including diversification and generation of ongoing passive income. It is therefore crucial to understand the value of real estate investments in a portfolio during a recession.

Mihal Gartenberg, agent at the New York-based Warburg Realty Partnership, said, "Real estate is an attractive asset. When the stock market is performing badly, investors looking for other opportunities find that real estate is a safe haven."

So, a recession is the best time to invest in real estate for 2 important reasons such as:

Stable revenue in the medium and long term. For example, rent payments are always due and are not tied to the stock market. Real estate investors have another advantage when it comes to using rental income to offset the effects of a recession. In fact, they are able to protect themselves from inflation and change interest rates when they have control over rental prices. Increasing the share of rents to renewals, for example, allows investors to keep up with rising prices.

Less sensitive to volatility than the stock market. Stock market volatility can add to an investor's recession problems if stock prices are swinging wide. This can directly impact a portfolio's return profile. Real estate's relative low correlation with stock market movements, on the other hand, may make it a more reliable choice during a recession. Moreover, this aspect makes real estate investments less risky, also because the brick is a tangible and essential asset.

The success of a real estate investor in an economic crisis largely depends on his strategy.

The decrease in sales will certainly also lead to a drop in prices. Indeed, if your investment pattern is currently tied to appreciation, the recession will be an unprofitable time.

When prices fall, a real estate investor always wins. If you're investing for the long-term, the perfect time to buy property is when everyone else is selling.

The question, at the same time, isn't really how low prices can be during a recession, but how much property you can afford to buy before prices return to normal. Always remember that real estate prices are cyclical, as are the rest of the economy and that often the variations can also concern the short term. A real estate transaction that is excellent to do today, may not be so in a few months.

Also, some tips:

See the crisis as an opportunity. The financial crisis will not last forever. At the same time, certain opportunities are also not permanent.

Be patient. The economy and the market will recover.

Conclusion

Real estate investments are a great passion for investors. You have surely heard: “there is nothing safer than investing in bricks and mortar”. But investing in real estate is a much more complex activity than you might imagine. In this article we will try to clarify, trying to offer some ideas to think about the subject of the common real estate investor, who perhaps has the objective of buying a house or who owns family properties and is considering whether to sell them or keep them.

The house, when it becomes an investment property, is an asset. This means that it must be evaluated with financial parameters: trying not to fall victim to some very common biases.

For those who don't have time to scroll through this article, we anticipate that real estate investments are investments that can be very profitable when the right opportunity is found. However, the value of real estate in Italy has depreciated on average in Italy, it is not easy to predict the trends of the real estate market and find a real estate investment that makes more alternatives easily accessible to investors, such as the financial markets. Real estate investments are also very illiquid. Buying the wrong property could be a mistake from which it is very difficult to go back.

If you have a sum of money available, we therefore advise you to thoroughly evaluate the opportunity to invest in the financial markets.