(Photo: Dafne Cholet)
For a lot of us, 2014 has shaped up to be a pretty good year for real estate. Home prices are climbing and ever so slowly getting back to normal. The economy just seems to “feel better” due to the emotions of people, increased spending, and overall sentiment vs. the 2008 recession. If you’ve been investing in real estate since the recession, you’ve probably been happy with the way the market has been rebounding. Home values are increasing again, tenants appear to be in strong supply, and buyers are out there trying to swoop up great deals. In some markets, the rents still have the potential to follow the One Percent Rule when the property is purchased right.
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So, what is the outlook for 2015? How is the investing arena going to play out as we move forward? According to Freddie Mac’s U.S. Economic and Housing Market Outlook projection: “The good news for 2015 is that the U.S. economy appears well poised to sustain about a 3.0 percent growth rate in 2015–only the second year in the past decade with growth at that pace or better.”
Digging deeper than the macroeconomic level and observing the housing market, the National Association of REALTORS® predict that “rent growth will likely reach 3.9 percent in 2015, only a slight dip from 4 percent this year.”
“Rent growth will likely reach 3.9 percent in 2015, only a slight dip from 4 percent this year.”
Lawrence Yun, the NAR’s Chief Economist, also states that “Low housing inventory and the sizable demand for rentals will continue to spur multifamily construction as well as keep rents rising above inflation through next year,”
Despite the market and economy recovering in the short term, other financial analysts such as Harry Dent and Peter Schiff warn of an economic collapse, the Dow tanking, or hyperinflation in the longer term. Are they right? We shall see…no one has a crystal ball. A lot of times, it’s a battle between Keynesian vs. Austrian economics. Depending on which side of the fence you are on, government money printing and low interest rates are either a good or a bad thing.
Staying Recession Proof with Real Estate
Okay, so we are getting pretty economical in a real estate investing blog. What is the point of bringing up potential economic problems in the long term? The point is that an investment portfolio with solid investment properties can help you weather a recession…here are some reasons why:
1) Bargains from recession: 2008 was a great time to be purchasing real estate. Prices were far below “normal” and many sellers were motivated. Buy cheap properties during the recession and hold for future appreciation and continued cash flow.
2) Rental demand: During a recession, it’s very difficult for most people to purchase a property due to a higher unemployment rate. Of course, the higher foreclosure rate also forced a lot of people into rentals since they needed a place to live regardless. This drives up demand, but perhaps at the expense of some rental fees. It’s important to assume that mid to lower scale apartments will be hotter targets than the high end condos and homes, which may get little to no demand. As long as available jobs in a city don’t decrease (i.e. a factory shuts down, etc.) people are still going to need somewhere to live in your city.
3) Steady income: The price of a home will decrease greatly during a recession. Since low rent demand increases, even if you have to decrease the rental price to compete for sensitive buyers, you can hold your property and leave it rented out during the recession until the market rebounds. Even if lower rent prices erode some of your cash flow, or leave it slightly negative, hanging in there can be preferable to selling a house at a loss or going underwater.
4) Long term appreciation: History has recently shown that despite the crash in home values during a recession, these home values do end up making a comeback. Real estate has an intrinsic value and is a “real asset.” If you purchase a property during the recession, you will come out ahead after the housing market stabilizes. If you bought before a recession, weathering the storm by renting allows you to hedge during this rough time with income to cover most (if not, all, and more than) your expenses and incur minimal impact during the recession.
By no means am I saying it’s good overall to have a recession. If you have a job as an employee or run a business, a recession decimates the unemployment rate and typically decreases the number of customers who will help your business grow or earn revenue. The important takeaway from this is that there are ways to protect yourself against a recession and try to make yourself “recession proof.” This requires you to step outside of the 401k, IRA, and stock comfort zone, which all drop hard with the market, and will take a great deal of time to recover back to what they started as. Use real estate to truly “diversify” your portfolio across different asset class and ensure that your 2015 goes off without a hitch!
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The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.