Over the past decade, the real estate market has appreciated significantly. Especially in the last five years, it’s soared to unparalleled heights.
For investors who have been plugged in the entire way, the gains have been massive. But if history tells us anything, it’s that markets are cyclical.
The American economy won’t enjoy unbridled growth indefinitely. At some point, a recession will happen, and savvy real estate investors will be prepared. Will you?
Recessions can emerge swiftly, but they don’t materialize out of thin air. When we look back and study past recessions, the warning signs are apparent. Three of the biggest indicators are:
Quickly escalating real estate prices. Rising home prices and steady home price growth are generally positive, but sharp increases over a short period of time can signal a bubble. When house prices begin to outpace home price growth tied to fundamentals like wage growth, affordability suffers as mortgage payments rise. If supply eventually exceeds demand, home sales slow, listings sit longer, and properties sell below asking price—classic ingredients for a potential housing market crash, or at the very least, a market correction.
Some observers see these factors emerging in today’s economy, while others argue the market remains firmly in bullish territory.
Regardless of personal opinion, a recession will inevitably arrive at some point. Whether it comes next month or a decade from now, being prepared for shifts in home prices, mortgage rates, and overall market conditions is always the smartest move.
Five Ways You Can Prepare for a Downturn
If you believe a recession is coming down the turnpike, then get to work. With a few decisive steps, you can insulate your portfolio and ensure minimal losses. Here are five key suggestions.
1. Slow Down on Fix and Flips
Just before the start of a recession isn’t the ideal time to purchase a large number of fix-and-flips. You’ll likely buy at the top of price growth, invest heavily in renovations, and then discover the property is worth less due to economic uncertainty and shifting financial markets. As interest rates fluctuate and housing affordability tightens, buyer demand can soften quickly—especially when housing supply begins to rise.
A better time to buy fix-and-flips is when the market bottoms out, rising inventory creates opportunities, and existing home sales slow enough to push prices downward. At that point, pent-up demand can later drive recovery. Until then, instead of fix-and-flips, investors are often better served by focusing on buy-and-hold properties.
Put your money into stable neighborhoods where it’s easy to attract renters, particularly areas that support affordable housing and help offset the broader affordability crisis. If you treat these properties as cash-flow engines rather than short-term appreciation plays, you won’t need to worry as much about temporary value drops caused by market cycles.
Common sense—and history—suggests the market will recover eventually, often with support from the private sector. In the meantime, you can continue collecting rent checks while waiting for long-term appreciation to return.
2. Build Up Cash Reserves
Savvy real estate investors don’t regard recessions as catastrophes. They view them as opportunities to purchase real estate at discounted prices.
In order to for you to do that, though, you must have sufficient resources. In the months leading up to a recession, you should do everything you can to boost your cash reserves.
This is not the time to be over-leveraged. You’ll want access to funds, and the only way to put yourself in a position to purchase discounted real estate is to pile up cash. When the time comes, you’ll be able to cut a check and buy properties outright.
3. Load Up on B- and C-Class Rentals
The good thing about owning rental properties is that there is still an abundance of renters during a recession. In fact, it could be argued that more people look to rent at that time.
But in order to reach these folks, you need the right properties in your portfolio. “Real estate investors tend to evaluate neighborhoods like school grades,” investor David Greene writes.
“A-class properties are the best spots in town, B-class is where the upper middle class lives, C-class is your average neighborhoods with lots of renters, and D-class properties are problematic with high-crime and high-vacancy rates.”
As a general rule — but particularly during a recession — you want your portfolio to consist primarily of B- and C-class properties. These are economically diverse markets that will experience less impact from a downturn in the market. They’ll produce consistent cash flow.
4. Open Lines of Credit
Though you want to avoid becoming over-leveraged in the days leading to a recession, access to funds is an undeniably desirable thing. Once the recession hits, it’s likely that banks and lenders will clam up and be less interested in dishing out loans.
This being the case, you should open up a line of credit today. This at least will give you the option, should a deal come along and you’re unable to get access to traditional financing.
5. Offload Risky Investments
If you own any risky investments, get rid of them. You have to be prepared for a 15-to-20-percent drop in rents, occupancy rates, etc. If you have a property that can’t withstand that magnitude of a hit, now’s the time to dump it and pool your resources into something else.
Over the last few years, the Houston real estate market has been one of the healthiest in the country. If you’re a real estate investor who specializes in residential rental properties, you can benefit from partnering with a professional property management service in order to offload some of the time-consuming responsibilities that fill your schedule and prevent you from focusing on the big picture.
At Green Residential, we’ve been in the Houston property management business for more than 30 years. Over that time, we’ve developed a dynamic approach to residential management that’s helped our clients remain profitable in both hot and cold markets.
To find out more about how we can help you accomplish your investment goals, please contact us today!
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