The Pros and Cons of Investing in Real Estate During a Recession

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices.

Luke Babich //May 9, 2023//

The Pros and Cons of Investing in Real Estate During a Recession

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices.

Luke Babich //May 9, 2023//

Regardless of your finances, investing in real estate during a recession might be a hard concept to wrap your head around, and understandably so. Although a potential 2023 recession won’t be like the Great Recession of 2008, which was directly related to the housing market, people and businesses alike are tightening belts in anticipation of financial hardship on an unknown scale.

READ: What Does a Recession Mean for Your Finances? 

A recession is broadly defined as an economic contraction or two consecutive quarters of GDP decline. A potential 2023 recession would impact various individuals and industries, especially the real estate industry.

Home prices rose in 2021 and stayed high in 2022 as more people sought new homes further away from city centers. Now, rising interest rates and daily layoffs will have some bearing on real estate in the coming months.

This doesn’t mean all hope is lost if you want to invest in real estate this year. Real estate buyers in good financial standing will still have options to invest in property. Here are some of the pros and cons of investing in real estate during uncertain economic times.

Pros of Investing in Real Estate During a Recession

1. Lower purchase prices for home buyers

Even the rumors of an economic downturn can be enough to drive down the demand for residential real estate. This decline in demand will likely lead to a decline in real estate prices, which spiked in 2022.

Home prices are not as threatened as they were in 2008, but interested and prepared buyers can take advantage of a likely dip in listing prices in hot real estate markets like Colorado’s.

2. Diversified assets

The stock market is one of the most visible ways a recession manifests for consumers. People who have money invested in the market may benefit from investing in real estate and other alternative assets while stock prices are on the decline.

3. Reduced competition

Despite the pros, investing in real estate isn’t part of most people’s recession finance strategies. Recessions often lead consumers to reduce their discretionary spending and instead shore up cash and emergency funds. 

The result could be the opposite of the buying frenzy many markets have seen since the start of the pandemic. With less competition for real estate, you won’t have to take as many risks to win any potential bidding wars.

Cons of Investing in Real Estate During a Recession

Higher interest rates

Many recession fears began when the Federal Reserve quickly drove up interest rates in 2022 to ease the effects of inflation. These high interest rates are still in place, making it more expensive for potential buyers to borrow money. Lenders are also likely to be more selective when evaluating candidates for a mortgage, prioritizing higher credit scores and increased down payment requirements.

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Increased personal financial risk

Recessions are unpredictable, but they often trigger an increase in unemployment as businesses let go of employees to cut costs. Before making a real estate purchase, make sure you have enough cash flow and stable income sources. If you were to lose your job or face any other short-term financial hardships, it could jeopardize your ability to pay for essentials. 

Real estate is still a costly purchase when you consider the associated closing costs and broker fees. Find ways to reduce some of these costs, such as working with a discount real estate agent or negotiating the total price.

Fewer people selling homes

If you’re planning to sell a property you already own in favor of a new one, a decline in listing prices could mean lower profits from the sale. Smaller profits will make it harder to buy a new, high-value investment property. 

Best types of real estate to invest in

If you have cash flow and income stability, a recession shouldn’t stop you from investing in Colorado real estate. Aside from a single-family home purchase, here are some alternative types of investments to consider.

READ: What Is the Difference Between Class A, B, C, and D Properties?

Rental Properties

A recession may slow down first-time home purchases, but people will still need housing. Purchasing a rental property provides another source of income for your household, whether it’s a short-term lease or a consistent vacation rental. Colorado in particular has become a desirable destination for remote workers who value the flexibility of short-term and vacation rentals, and an economic downturn might mean rental property owners are ready to sell.

As with any property investment, owning a rental property also means taking on landlord responsibilities and maintenance costs. Be sure to factor those in as you evaluate whether a rental property purchase is right for you.

Properties you can “flip”

For those with time, patience and the real estate knowledge to flip a house, banks and owners selling homes for cash provide an opportunity to turn a respectable profit on a real estate investment. But flipping a house isn’t as simple as reality television makes it seem. Ensure you have the cash on hand to make the purchase and cover any expenses incurred during the renovation.

If you’re not ready to take on the financial risk of a fixer-upper, try wholesaling to earn extra income from real estate during a recession. Wholesaling is a short-term strategy similar to flipping but that doesn’t require the wholesaler to purchase the property. Instead, wholesalers work as intermediaries to help eager sellers let go of their properties, accumulating capital in the process.

READ: How to Sell Your House in a Down Market — 6 Easy Tips

Real estate and REIT ETFs

Investors who want the financial benefits of real estate investing without the burdens of home or property ownership should consider real estate or REIT exchange-traded funds (ETFs). REIT ETFs add the diversity that real estate investment offers in a financial portfolio without the surprise costs of physically owning and managing a property. These ETFs are also often low-cost, an added benefit during a period of economic downturn.

Investing in real estate during a recession is still possible

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices. Real estate investment, like any investment, comes with risk. As a potential investor, it’s important to evaluate how much risk you are willing to tolerate in exchange for the addition to your portfolio.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.