The S&P 500 fell 57% during the Great Recession. This is not a reassuring consideration if you are worried about the looming recession analysts estimate to hit the United States in 2023. Bearing in Mind the S&P 500 has fallen 14% in 2022 YTD and we have our 8th consecutive losing week in the stock market as of this morning, it is my opinion we are already in a recession and facing inflation, and possibly hyper-inflation, worldwide. As the Federal Reserve continues raising interest rates to combat inflation, analysts are considering a recession in 2023 to be likely. The United States economy shrank 1.4% in the first quarter of 2022 due to a record trade deficit. Demand, consumer spending, and business investment accelerated at the start of 2022, guiding the Federal Reserve to produce a second quarter estimated GDP of +1.8% as of May 19th.
As of this morning, May 20th, before releasing this article the Federal Reserve has already adjusted their GDP estimate down to +1.3%.
How do rental properties fare during recessions? Does real estate protect your investment portfolio? Depending on the investment strategy, most of the time the answer is yes. Here’s why.
Historical Rent Values During a Recession
I am undoubtedly prejudiced considering I am a property manager and Realtor, but the data supports the fact that recessions can be extremely good for rental property owners. I would certainly never hope for a poor economy, one should consider if recessions are profitable for rental properties, then a strong economy is even more profitable.
Landlords can relax knowing rent does not decline historically during a recession. Rent may flatten but does not drop. The Great Recession was largely caused by a housing bubble, but rental properties did not fail. While appreciation leveled, home prices rarely drop in excess of 5 percent; landlords did not unexpectedly begin losing money month over month from rent falling below breakeven levels. The glaring exception was the Great Recession. Oftentimes there are other circumstances at play such as oil prices, international disagreements, or even war.
Rental Vacancy Rates In Recessions
Landlords often experience vacancy rate spikes during a recession. A shrinking economy and leaves people unemployed. Workers who retain their jobs may feel insecure about their future, which can in turn push those individuals to downsize, or consider moving in with family or friends to save money. A household bundling effect leaves less demand for rental properties and creates more vacant properties. One should not assume the same occupancy rate during a recession as they have now. Landlords need to make sure they screen prospective tenants prudently for stability, job security, and a clear history of never defaulting on rents. Landlords need to rent to an individual who meets specific application requirements and criteria, including passing a comprehensive credit check, background check, eviction history check, income verification, and residential rental history verification.
No matter how well you screen tenants, beware of higher turnover rates, defaulting rent payments, and vacancies during a recession. Placing a bad tenant can quickly become an extremely expensive experience, this is where the true risk to rental properties lies during a good economy or during a recession. High turnover rates cost landlords in lost rental income, but also in greater maintenance costs such as repainting, new flooring, and other turn over associated costs.
Stocks During a Recession
How does the stock market perform during a recession? Stocks and real estate serve different roles in your portfolio. Stocks characteristically lose value leading up to and during a recession; however, the stock market predictably rebounds quickly following the end of a recession. The S&P 500 gained 16% on average in the years following recessions. Stock markets are far more volatile than real estate investments and lose more value in recessions, but that does not mean you should not invest in stocks just as the risk of turnovers and evictions does not mean you should avoid rentals.
Final Thoughts
I love real estate investments because investors have far more control over their returns than they would in the stock market. Real estate investments similarly offer stability and ongoing income to counterbalance huge swings historically experienced in the stock market. Purchasing recession proof investment properties is how I will personally retire. I recognize the fundamental requirements an investor must meet to purchase and manage an investment property. Our brokerage works hard to be your “one-stop shop” to identify cash-flow positive investment opportunities, represent you throughout the purchase; then work to quickly place a highly qualified tenant and manage the day-to-day responsibilities for your portfolio.
Contact us today to schedule a meeting to learn more about the investment opportunities to start or expand your real estate investment portfolio today.
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