Is Rental Property a Good Investment in a Recession? - Willowdale Equity (2024)

FAQs

Is it smart to buy a rental property during a recession? ›

Real estate is a great asset to own when the economy is in freefall. A rental property typically acts as a natural hedge in a volatile market. Primarily because many people that sell their homes or properties during an economic downturn or recession need to sell their property.

The return on equity in real estate is the percentage return on an investor's equity in the property. A good ROE depends on your market. Generally, as with ROI, the higher the better. For most markets in the United States, an ROE of 2-5% or more would be considered good.

Just because there's a recession doesn't necessarily mean rent prices go down. In fact, during the 2008 recession, it was the exact opposite. In the current rental market, we have seen the rate of increase in rental prices come down, but this only translates to lower rent prices if you're in select markets.

Commercial real estate is one of the best investments in a recession, but not all classes of real estate do well.

Overall, it appears that the North Carolina housing market is expected to remain robust in 2023 and 2024, with most regions experiencing moderate to strong growth in housing prices. However, there may be some regional variations in terms of growth rates.

What Happens to Rents in a Recession? Rents can go both up and down in a recession. The location of a rental property and how hard the local economy is hit by a recession will dictate whether rents go up, down or stay the same.

Generally, a good ROI for rental property is considered to be around 8 to 12% or higher. However, many investors aim for even higher returns. It's important to remember that ROI isn't the only factor to consider while evaluating the profitability of a rental property investment.

A good ROI for a rental property is typically more than 10%, but 5%–10% can also be acceptable. But the ROI may be lower in the first year, due to the upfront costs of buying a home. A fixer-upper may offer more upfront savings as their average list price is 25% lower than turnkey homes.

A return on equity (ROE) of 20+% is considered good, 30% ROE is considered exceptional.

In general, buying a home during a recession will get you a better deal. The number of foreclosures or owners who have to sell to stay afloat increases, typically leading to more homes available on the market and lower home prices.

Are we in a recession 2023? ›

The widely predicted U.S. recession remains out of sight as the first half of 2023 winds down, but the consumer sector that has fueled a remarkable recovery from the pandemic shutdowns may finally be showing signs of fraying.

There are several reasons to consider buying a home during recessions - the two main reasons are less competition and lower prices. There are also several potential drawbacks, like sky-high interest rates, a floor on pricing decreases and potential income changes if the U.S. does officially slide into a recession.

Bonds and cash have historically outperformed most stocks during recessions. Selling stocks in favor of bonds and cash before a recession may leave you unprepared if stocks bounce back before the economy does, which has happened historically during many recessions.

Some stock market sectors, like health care and consumer staples, generally perform better than others in a recession. Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification.

The best way to recession-proof your property is to ensure that it provides a steady and consistent income stream. This is where the long-term lease agreement comes in. As you prepare for a recession, it may be wise to negotiate a long-term agreement with your tenant in exchange for a slightly lower rental rate.

While a housing price correction is expected, we aren't in a housing bubble. Demand for homes remains high, and there are fewer home sellers than there were in 2022. And while the market is cooling, experts don't expect an actual housing crash or a housing bubble burst in 2023.

The average price of rent has gone up 28% since 2020, according to a new report. Here's how much you have to make to afford an apartment in Charlotte. The price of rent continues to climb in North Carolina with the average person paying 28% more than they did in 2020, a new report found.

Rent rose by 10.4% in South Carolina on average in 2022, according to RentHub, an online real estate data and analytics platform. The state ended the year with a median rent of $1,800 in December, up from $1,700 during the same month in 2021.

Unable to collect rents from unemployed tenants or from relief agen- cies, great numbers of landlords postponed evictions until taxes, mort- gage payments, or both were long delinquent. Many saw their properties sold because of these delinquencies.

According to MPF Research, nominal rents for large invest- ment-grade apartment properties slipped 0.3 percent in 2008 and then dropped 4.1 percent in 2009—both declines outpacing the change in overall prices.

Can you negotiate rent? ›

The short answer is, yes. You can negotiate your rent. When you're renting an apartment, the price you pay isn't set in stone. But before you even consider negotiating, you need to make sure you know why you're asking for a discount.

The amount will depend on your specific situation, but a good rule of thumb is to aim for at least 10% profit after all expenses and taxes. While 10% is a good target, you may be able to make more depending on the property and the rental market.

What Is The 1% Rule In Real Estate? The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.

The 2% rule in real estate is another simple way to calculate ROI for rental properties. According to this rule, if the monthly rent for a rental property is at least 2% of its purchase price, then odds are it should generate positive cash flow.

What is an average ROI on real estate? According to the S&P 500 Index, the average annual return on investment for residential real estate in the United States is 10.6 percent. Commercial real estate averages a slightly lower ROI of 9.5 percent, while REITs average a slightly higher 11.8 percent.

What is a good return on equity? While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good. At 5%, the ratio would be considered low.

The general rule of thumb for how much retirement savings you should have by age 40 is three times your household income.

ROE is especially used for comparing the performance of companies in the same industry. As with return on capital, a ROE is a measure of management's ability to generate income from the equity available to it. ROEs of 15–20% are generally considered good.

Should you hold onto cash during a recession? ›

Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.

The median price for a U.S. home sold during the fourth quarter of 2008 fell to $180,100, down from $205,700 during the last quarter of 2007. Prices fell by a record 9.5% in 2008, to $197,100, compared to $217,900 in 2007. In comparison, median home prices dipped a mere 1.6% between 2006 and 2007.

Because people have less money to spend, demand falls, taking the prices of many goods and services with it. Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same.

In a best-case scenario, the U.S. will likely see a 'soft landing' with low/slow growth across 2023 before picking up in 2024. However, a downside scenario is a real possibility and could see the U.S. enter a prolonged recession lasting well into 2024, as is currently forecast for the UK and Germany.

Following the 2024 recession, the economy is slated to improve, with rising trends anticipated for US GDP, US Industrial Production, and many individual industries and markets in 2025. This should continue through the rest of the 2020s, with the US economy rising at various rates during that time.

Before a recession hits, home prices are typically at an all-time high. This means that selling your home before a recession will result in a higher profit between the purchase price of the real estate and the sale price, which can increase your capital gains taxes.

Buyers in a recession may struggle to purchase your home if mortgage rates remain high, and your home may not sell for as much as it could have gotten during the height of the seller's market.

Homeowners owe more on their mortgages than their homes were worth and can no longer just flip their way out of their homes if they cannot make the new, higher payments. Instead, they will lose their homes to foreclosure and often file for bankruptcy in the process.

What sells in a recession? ›

Pre-packaged food items, like chips and cookies, offer shelf-stable options to help ensure your stock doesn't go bad as you're building consumer awareness of your expanded offerings. Toothpaste, deodorant, shampoo, toilet paper, and other grooming and personal care items are always in demand.

For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.

Will house prices go down in a recession? While the cost of financing a home typically increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.

Self-storage is a good investment during a recession because as people are forced to sell their homes or downsize, many will need a temporary storage solution by the way of self-storage. Lastly, consider refinancing any properties that have a higher than market-rate debt.

Buying property ahead of a potential recession is suboptimal timing. I lost a bidding war ahead of a small downturn and I felt great. However, if you do buy property and a recession hits, you'll be fine so long as you keep paying your mortgage and property taxes.

In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.

To create income from real estate during a recession, you need to be diversified with the types of real estate investing you're involved in, such as REITs, buy & hold, fix & flips, mobile home parks, multifamily, and others.

Real estate values typically fall during a recession. Longer and deeper recessions will have the greater effect on home values. Selling today could help you from selling at a lower price in the future.

What should you not do in a recession? ›

Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.

Bonds and cash have historically outperformed most stocks during recessions. Selling stocks in favor of bonds and cash before a recession may leave you unprepared if stocks bounce back before the economy does, which has happened historically during many recessions.