I know what you’re thinking: Lou, how can investing in real estate be a good idea during a recession when the last recession was so bad for the housing market? It’s a good question. But it’s also important to keep in mind that the last recession was largely caused by the Subprime Mortgage Crisis, and so home values were inevitably going to take a hit during that recession. I did a little research, and historically, real estate has been a very wise investment during a recession. In fact, according to a USA Today article:
“…real estate’s performance during the Great Recession is the exception rather than the rule. Consider the 19 bear markets since 1952 other than the one between 2007 and 2009: The Case-Shiller index shows increases in all but one, and in the one in which it fell, it declined by just 0.4%. Even including the Great Recession, Case-Shiller shows an annualized average increase of 4.6% for all stock bear markets since 1950.” – USA TODAY
In the years since the last recession, we’ve seen the real estate market rebound in a healthy way. Growth has been strong and steady, but not volcanic as it was in the years leading up to the 2007 crash. So given the historical performance of real estate in times of economic recession, why don’t more people invest in it?
It comes down to long-term vs short-term thinking. Real estate investing is a long-term investment strategy where the investor buys properties and rents them out over a long period of time. If managed properly, the rent fee collected pays the mortgage, maintenance and tax expenses of the property, as well as putting some money in the bank each month. Over time, you can pay down the mortgage a significant amount, and when you do decide to sell the property, the amount of profit you stand to make can be substantial. Remember, real estate prices always go up in the long term.
This may seem like a lot of work in the meantime, and it can be. But there are many, many companies who will manage your rental properties for you, and even after paying a management fee, you can still see positive cash flow in a rental each month.
Some things to keep in mind about rentals:
- Rents rarely decrease, even in a recession
- The demand for rentals goes up in a recession
- Real Estate is a tangible asset, unlike so many other investments
It bears mentioning that real estate investment is not the same thing as real estate speculation. Speculation is buying properties with the intent of either fixing them up and quickly selling them or waiting a short period of time for the market value to increase and selling the property for a profit. Speculation can be lucrative, but is a far more risky strategy than long-term real estate investment.
It’s also worth mentioning that Northern Virginia is one of the best regions in the country for real estate investment. The economy is perennially strong, and the housing market is historically one of the most stable.
Now, I’m not saying you should sell all of your stocks and bonds, and put it all into real estate. However, real estate investments can offer you valuable diversification in times of economic uncertainty, and help you and your portfolio weather the next recession.
If you’d like more information on real estate investment, or to discuss possible investment opportunities, please get in touch anytime.