10 Strategies for Investing in Real Estate During an Economic Downturn

The period of robust and consistent economic expansion since the pandemic seems to be coming to an end. Consumer prices continue to rise, but the annual inflation rate dropped to 5% in March. That’s significantly lower than the 9% reported in June 2022 but still much higher than the target rate of 2% set by the Federal Reserve.

The possibility of a looming recession could prompt some apprehensive investors to liquidate their assets, while others may focus on real estate ventures that show resilience during an economic downturn. In a recession, a portfolio may temporarily decrease in value, but for astute investors, downturns can present opportunities.

Whether you own investment property or are considering entering the real estate market during a recession, it’s crucial to have a profit-maximizing strategy in place and manage your portfolio wisely through an investment app or other platform. It’s common for investors to adopt a more cautious approach, but the most advantageous strategy, in the long run, is to take a more assertive stance by increasing investments in assets that can generate the highest returns.

Here are 10 strategies investors can use to protect and expand their investments during times of economic uncertainty:

1. Focus on Cash Flow

In uncertain financial times, it’s crucial to focus on finding properties that generate positive cash flow. These properties produce more income than expenses, such as mortgage payments, maintenance costs, and taxes. Experts recommend properties that produce 10%–12% cash-on-cash return after expenses. Investors should also look for properties that house long-term tenants and avoid properties that have high vacancy rates.

It’s vital that investors pay attention to their cash reserves when investing in rental properties. During a recession, there might be a longer interval between property acquisition and income generation, making liquid cash reserves necessary. Maintaining accessible cash reserves can help offset expenses in the interim and decrease reliance on securing capital from a lender. For investors who do need to rely on funding from a lender, most banks require at least a 10% down payment on second homes.

2. Don’t forget about location

When investing in rental properties, it’s crucial to understand the area and evaluate the overall market. An ideal location for an investment property would be an area with high demand and rental rates that can maintain a desirable profit margin. During a recession, a key strategy is prioritizing the location over the property itself.

3. Invest in multifamily properties

Multifamily properties are likely to experience a surge in demand during an economic downturn because individuals with financial difficulties may need to reduce their living expenses by downsizing. Those who previously resided in a detached home may opt to sell their property and relocate to a multifamily dwelling, such as a duplex.

Increased demand during a recession may reduce the number of units that sit vacant for an extended period of time. Investing in a multifamily property is also an effective hedge against inflation because when prices increase, investors can raise rental rates and maintain their revenue
stream.