Real estate investors are used to charting the unknown. Even though real estate is a time-tested and proven strategy, it isn’t without its curveballs. As much as we can speculate and make educated guesses, it can be hard to know exactly what the market is about to do. The same can be said for the economy as a whole!
There are rules, patterns, trends, and cause and effect. But at the end of the day, whether we’re talking about real estate or the economy, people are at the heart of it all. People are not always predictable, rational, or logical. As a result, markets don’t always make sense. Plus, Covid-19 was a massive wildcard that caused an economic downturn. However, speaking about markets not making sense, real estate hardly seemed to notice we were in a recession.
Part of being a successful real estate investor is practicing due diligence. While due diligence encompasses numerous tasks and considerations, it comes down to this: Do your homework. I often tell investors in my two real estate niches—turnkey real estate and long-term property management—to take nothing on faith! You must make whomever you work with earn your trust. Reputation can go a long way, especially in today’s investing climate. But nothing can replace an investor doing tough due diligence to make sure their expectation will be met.
Prepare for a market shift
Modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing.
Preparation is half the real estate battle
The more educated you are in your strategy, market, and portfolio, the easier it will be to tackle anything that comes your way. For real estate investors, the unexpected is inevitable. How we deal with the unforeseen is the true test of our mettle!
Between the Great Recession and the COVID-19 pandemic, real estate investors have weathered countless challenges over the past 20 years. Part of what keeps us moving in the right direction is preparation. While we can’t account for every eventuality, we can look at the likely scenarios and plan accordingly.
Smart, decisive action is just as important during market recovery as it is during a crash. To help you prepare for a world beginning to economically recover from COVID-19, here are the different kinds of economic recovery—and what investors should do to prepare!
Each type of economic recovery we’re going to talk about is named for their visual. When charted, these major economic indicators (such as employment and GDP) form a resemblance to their designated letter. Knowing these types of recovery and what they indicate can help you as you interpret data with greater insight.
While economic data may take different shapes, these are the five most commonly identified by economists.
Examples: The Nixon Recession (1973-75), Savings and Loan Crisis (1990-91)
U-shaped market recovery is characterized by a steep decline and a slow, slogging return to pre-recession activity. The market will settle into a longer period of depression before recovery sets in. However, once recovery begins, it does not return to a depressed phase. U-shaped recession and recovery see a sharp decline followed by stagnation, then a healthy climb back upwards. The period of stagnation typically lasts between one and two years.
Key investor strategies:
The U-shaped pattern of recession and recovery is not the most ideal, but it’s far from the worst-case scenario. Investors will want to be attentive to opportunities that present themselves in the low points of recovery—the window of opportunity is smaller.
These are the times when, given economic conditions, you may be able to find better deals on properties. Short-term investors can jump in the trough of the recovery period and profit with recovery. Long-term investors may not be significantly impacted due to the relatively short period of a deep recession.
Examples: The Lost Decade (1990s Japan), The Great Depression, The Great Recession
An L-shaped recovery is the least desirable. If the examples of these types of recoveries are any indication, we can expect a long, rough road ahead. L-shaped recovery hardly looks like a recovery at all. In these instances, a thriving market suddenly crashes. In the following recession, the market struggles to regain lost ground. This slow rate of recovery defines its type.
Unemployment is persistently high, investors are shy to return to the market, and the GDP is slow to grow. It’s a tough time for everyone involved.
Key investor strategies:
Understandably, many people are fearful to make moves during a prolonged economic recession. However, we know that there are opportunities for investors even in challenging circumstances.
In the wake of The Great Recession, real estate investors played an instrumental role in housing market recovery and, as a result, overall economic recovery. By taking advantage of deals on foreclosed properties, investors were able to inject demand—and value—back into a floundering market.
L-shaped recoveries best serve long-term investors who are willing to outlast the long recovery period. Investing in real estate during these times is rather easy. However, investors fail if they neglect due diligence just to seize a deal. Here, patience pays off. Be prudent in these long, slow periods of recovery. Focus on saving and building up your safety net, protecting your assets, and revisiting your portfolio goals. Make necessary adjustments to your timelines based on your changing economic circumstances and the opportunities available to you.
Example: The US 1980s recession
While an L-shaped recovery can be arduous, a W-shaped recovery adds a level of unpredictability that others lack. In this type of recovery, we see a sharp decline followed by “false recovery” and a second recession before the market truly bounces back. This is also called a “double-dip” recovery. Overall, it is characterized by high market volatility. The second downturn is often the result of a secondary recession.
Because false recovery sets in rather quickly, many will hope for a V-shaped recovery. This can lead to investors acting too early and getting burned when the market suffers a second downturn. The yo-yo of the economy creates ample market anxiety.
Key investor strategies:
Thankfully, a W-shaped recession and recovery are relatively rare. In fact, the 1980s recession is the only known instance of this type of recovery in the United States. For real estate investors, as with an L-shaped recovery, patience is key. A buy-and-hold strategy will lessen the impact of the double-whammy served by this scenario.
As for other investment strategies? Lean on due diligence. As always, never invest more than you are willing to lose. Be thorough, be patient, and be prudent. We don’t want to miss out on opportunities, but jumping the gun can harm your portfolio.
Examples: Recessions of 1920-21 and 1953
In a world where recessions are inevitable, a V-shaped recession and recovery are what we want to see. It is the best-case scenario simply because of how quickly the market bounces back. After a sharp decline, the market experiences a climb just as sharp back to pre-recession levels.
These types of recessions are the easiest to handle, but the margin for capitalizing on low-point opportunities is incredibly small. Depending on your strategy, agility might be your most vital quality. The decline may last, as in 1953, for less than a year.
Key investor strategies:
In short, don’t panic. While this goes for every type of recession, it is more true in a V-shaped scenario. These recessions do not last long. They are often curbed through government intervention. If a recession is spotted early, the government can act to stimulate the economy and lessen the dip.
Investors, be patient. Remember that a recession is not an indicator that you need to jump ship. Instead, wait. You will know what you are dealing with soon enough!
What we’re dealing with now: K-shaped recovery
Example: COVID-19 recession
The K-shaped model of recession and recovery differs from all the others. While every other letter is based on aggregated information, a K-shape only emerges when the data is broken down by different industries or parts of the economy. This is when, after a sharp recession, different areas of the economy recover at starkly different speeds. Some may even continue to decline where others recover.
We’re seeing this now. During the COVID-19 recession, unemployment spiked to record highs and left many businesses in jeopardy. Restaurants, retail, and hospitality sectors struggled in particular.
However, we’ve seen that neither the stock market nor the real estate market reflects the ongoing hardships of everyday Americans. The stock market ended 2020 on record growth and real estate saw its own record-shattering metrics. The median housing price rose, particularly in secondary, less dense markets. Rental rates are still on the rise. Inventory is tight and demand is high. A stellar year in stock and real estate, however, has not translated to the economy at-large.
Key investor strategies:
Be mindful. K-shaped recovery is uncommon and usually followed by significant economic and structural changes. As gaps of disparity widen—impacting the most vulnerable households in the nation—it is only a matter of time before the system cracks under the pressure.
Because this is where we likely are now, let’s dive a little more into the nature of K-shaped recession and recovery.
The consequences of K-shaped recovery
Ultimately, K-shaped recovery highlights inequality. While a K-shaped recovery doesn’t come with W-shaped whiplash, it can be equally as confusing. While those in industries that have recovered may contribute to the ailing economy, the theory of trickle-down economics does not make a real difference.
In the end, recovery is not happening evenly. Those in good economic standing will be impacted if those at the bottom don’t see recovery too. After all, we’re interconnected.
For example, record unemployment rates and jobless claims mean that many Americans are struggling to make ends meet. If left unaddressed, this means that more and more people will struggle to make their rent and mortgage payments. And forget about non-essential retail spending! A lack of a strong, growing job market signifies a market ready to grind to a halt if it hasn’t already. K-shaped recovery, over the long-term, is bad news. The poorly performing areas of the economy will eventually pull the high-performers down.
Investor strategies in a K-shaped recession & recovery
Real estate investors are in a strange position right now.
For those of us who invest in single-family residential real estate, we’re pretty happy! Although the economy has caused some households to struggle with making rent payments, the market, in this area, has been relatively stable. Not only that, but the demand for single-family residences aka SFRs has grown to a fever pitch.
Other areas of real estate—multifamily, commercial, and hospitality—have all been hit harder by the pandemic. In the same way, primary markets like New York City have also seen a sharp decline in real estate demand and values. This is in part due to the out-migration from dense urban areas to more spacious suburban sectors. Not only that, but we’re seeing inward migration to secondary and tertiary markets.
As always, real estate investors need a strong handle on their strategy. There are opportunities to be found for long-term investors across the board. The areas of real estate that are struggling now will recover in time. If investors are patient, they stand to generate a lot of wealth as the market recovers. For those who invest in single-family properties, be mindful of your market. The markets that will fare better in the future are those with stronger job markets and greater economic activity. These will have a small gap in inequality, and your investments will be more stable for it.
By and large, this recession has been favorable to the real estate sector. As with The Great Recession, we expect the industry—and its investors—to play a key role in overall economic recovery.
Right now, prioritize absolute clarity for your portfolio. Know where you want to be and what kinds of investments you want to make. By strategically diversifying your portfolio to include more stable, growing markets, you stand to lose less if K-shaped recovery is less than temporary. If it is temporary, then we move away from those economic breaking points that could radically change the world as we know it.
K-shaped recession and recovery are known to create economic and societal change. The world is not the same afterward. The length of the recession will determine just how much things change. Investors, focus on brushing up on your long-term strategy, clarifying your investment goals, and replenishing your safety net. And now, more than ever, prioritize due diligence.
I’ll close with this: Savvy investors can succeed in every stage of the real estate cycle and any state of recession or recovery. If you have the right mindset and the determination to succeed, you can make it happen regardless of the economic circumstances. Don’t count yourself out!