Is a recession coming? Real estate will outpace other assets
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Americans are concerned about the last quarter of 2023, and 68% of them fear that a recession is brewing.
According to a survey conducted by Nationwide Mutual Insurance Company, 80% of respondents feel that if we see a recession, it will be severe. About 62% of those surveyed believe that the recession could be worse than the Great Recession that shook the economy in the period 2007-2009. If these expectations come true, ordinary people in the United States will have a hard time.
Although manufacturing and industrial production have weakened this year, employment and income growth have remained strong, with short-term yields outpacing long-term yields on Treasury bonds. Some experts believe this is a clear indication of a recession on the horizon. But the good news is that even if a downturn occurs, some traditionally stable investment assets are likely to remain strong.
Real estate holds value during downturns in the market
The history of US real estate indicates that this sector, compared to other assets, has performed relatively better at retaining its value. The availability of land for building and the supply of existing real estate are likely to decline during a recession. Moreover, studies indicate that the value of certain categories of real estate will outweigh the influence of the inflationary market environment. For doctors and other working professionals, investment in real estate is gaining momentum.
It is true that high interest rates have depressed real estate values in the short term and caused severe financial stress on real estate owners and operators. However, this also allows savvy operators to take advantage of depreciation in the short term by acquiring high quality assets on profitable terms. Moreover, the Fed is likely to cut short and medium term interest rates soon.
Real estate investment in light of the market downturn
Many experts feel that asset classes such as multi-family buildings, medical offices, self-storage, and industrial industries would be particularly suitable for investing during a recession. Rising mortgage rates and the inability to afford single-family housing has increased the demand for multifamily housing rentals.
As patients return to in-person visits after the pandemic, medical offices across the United States are seeing occupancy soar. Lower capital spending and counter-cyclical demand may continue to benefit from self-storage. Finally, with an increased focus on e-commerce and improved supply chain logistics, a comeback is undoubtedly within the reach of industrial real estate.
Making any investments during a recession seems intimidating. There are some tax advantages that can make real estate a worthwhile investment option, even during inflation.
The continued demand for housing
The greatest strength of real estate is that people will always need places to live. A recession may lead to lower spending, but housing is not an expense that people cut out of their monthly budget. Therefore the decline in rental income may be less than the share prices.
Real estate is not 100% recession proof but is generally more resilient than other assets.
While the general state of the economy affects real estate, the need for homes often supersedes these factors.
Create cash flow
Generating cash flow is another reason real estate investing can make a difference during a recession. Unlike other assets that pay only when sold or retired, real estate can provide rental income. This cash flow can provide some liquidity when the market is down.
Recessions rarely lead to lower rental prices. On the contrary, they may increase in some cases, such as inflation. The novel coronavirus (COVID-19) has accelerated rents, and although some markets like Miami have had declining rents, they are still ahead of historical trends. People are reluctant to make large purchases in tough economic times, and residents are likely to continue renting. Liquidity is important during a market downturn because most people need to adjust elsewhere. And as other investments falter, the additional income generated by real estate can provide a much-needed safety cushion.
Since 1980, the US economy has experienced five recessions. In four of them, the average annual decline in house prices was 5%.
If the same historical pattern repeats, it could become a much cheaper home to buy and a good investment when the market recovers. And when interest rates drop in 2025 and beyond, properties bought now will be on the verge of success.
Many viable investment opportunities in real estate can provide some relief during an economic downturn. Real estate crowdfunding has recently made real estate investing more accessible to ordinary investors. One form of peer-to-peer lending involves collecting money from a large number of people to invest in large projects often beyond what an individual can manage. Investors buy real estate shares proportional to the amount invested. Income from real estate crowdfunding can be distributed through one specific payment or recurring income distributions.
Investing in real estate crowdfunding offers great protection against a recession. Before making this type of investment decision during a recession, there are many factors to consider: cash flow, diversification, risk and return, positioning and recession-proof assets.
The growing popularity of crowdfunding in real estate has led to the emergence of several investment platforms. CrowdStreet investment platform has gained traction by offering many real estate investment opportunities. This platform provides investments in office, hospitality, industrial, retail, senior housing, multi-family office, medical office, warehousing and many other categories. The platform has funded more than 2.4 billion US dollars in 500 projects, with a total capital of more than 21 billion US dollars.
Fundrise is another popular platform among individuals looking for passive real estate investment opportunities. Unlike similar platforms, Fundrise is open to non-accredited investors. Investors can get started on this platform with a minimum investment of $10. Investors can also invest in real estate investment trusts (eREITs) instead of single projects – money invested in many projects with different risks and returns. The platform issues monthly dividends, and investors can accept cash or reinvest.
Finally, it’s worth noting that although recessions are annoying, the right investment can make a difference in a person’s assets. Although investing in real estate does not guarantee success, this option is more reliable than other asset classes. With the fear of another recession on the horizon, investors should carefully review their financial situation and consider relatively safer options.
This article was produced by Physicians on Fire and published by Wealth of Geeks.