When a recession sets in, the value of your stock portfolio may take a hit if prices drop temporarily. While downturns aren’t necessarily ideal, they can create opportunities for savvy real estate investors. If you’re thinking of getting into real estate investing during a recession or you already own investment property, it’s important to have a strategy for maximizing profits. A financial advisor could guide you in making real estate investment decisions during a recession.
Is Real Estate a Good Investment in a Recession?
A recession is marked by a shrinking economy. People spend less money on discretionary purchases, focusing instead on essentials. Companies may slow down hiring or begin laying off workers to bolster their bottom lines. Stock prices may drop in the face of uncertainty about the economy.
While it’s not exactly a rosy picture, real estate can offer some stability for investors when the economy slows. There are three primary factors that can make real estate a good buy if you’re looking for an alternative to the market in a recession:
- Low correlation to stocks. Historically, real estate has a low correlation to the stock market. That means that even if stocks are experiencing increased volatility because of a recession, there’s very little carryover to the real estate market.
- People still need housing. Even when the economy is in a downturn, people still need a place to leave. If demand for rental properties remains steady or even rises during a recession and there’s a limited supply of housing to go around, property investors are better positioned to be able to count on a steady stream of rental income.
- Recessions create bargains. A recession doesn’t automatically precede a drop in home values. But if a recession causes a hot housing market to cool off, that could open up opportunities for investors to purchase rental properties at a discount.
Real estate can also act as a hedge against inflation in the event that a recession leads to stagflation. Stagflation is marked by high inflation and high unemployment. Real estate prices tend to keep pace with rising consumer prices, making them a more inflation-proof investment.
Best Real Estate Investments for a Recession
If you’re interested in getting started with real estate investing during a recession, the first thing to consider is what types of properties might work best for you. Buying a rental property might be an obvious choice. As long as you’re able to keep tenants, renting out property can generate income through a recession.
There are different types of rental properties you might consider, including:
- Single-family homes
- Tiny homes
- Duplexes, triplexes and quadplexes
- Apartment buildings
- Condos
The more units you’re able to rent out, the more rental income you can generate. But more units can mean higher maintenance costs and more responsibilities overall. You can higher a property manager to oversee your rentals for you but you’ll have to pay them a fee, which can detract from your profits.
If you’re not interested in owning rental property for the long term, you might try flipping real estate instead. Flipping means finding a property, fixing it up, then reselling it for more than what you paid. Flipping properties in a recession can be tricky since the pool of ready homebuyers might shrink.
The longer the home sits on the market, the more you might pay toward the mortgage if you took out a loan to purchase it. But if you’re able to find a qualified buyer relatively quickly, flipping homes could allow you to pocket significant profits if you’re buying homes at rock-bottom prices.
It’s not just residential real estate that can be a good buy during a recession either. Certain types of commercial property, such as warehouse space and farmland, may continue to do well during a downturn. As with housing, people still need basic commodities like wheat and corn products during a recession, which are things farmland investments can be used to produce.
Student housing and senior housing can also be good investments since students still need a place to live while attending school. The aging population in the U.S. means that demand for senior housing isn’t likely to go away any time soon, whether there’s a recession going on or not.
Investing in commercial properties can be attractive since you don’t need to get a loan or buy property. Instead, you could invest in a real estate investment trust (REIT) or through a real estate crowdfunding platform. REITs and real estate crowdfunding can offer the benefits of property ownership without having to actually own it. You can also invest in real estate stocks or exchange-traded funds (ETFs) without having to buy any property
Example of an Investment Portfolio During a Recession
A balanced portfolio during a recession can include a mix of REITs, stocks, bonds and cash reserves to focus on steady income and minimize losses. Below is an example of how an investor with a $100,000 portfolio might allocate funds during a recession.
1. Real Estate Investment Trusts (REITs): 40% ($40,000)
REITs provide exposure to real estate without directly owning property. These investments can generate dividend income and remain relatively stable in downturns:
- Residential REITs ($15,000): Focus on apartment buildings and student housing, where demand remains steady.
- Healthcare REITs ($10,000): Invest in medical facilities and senior housing, sectors that remain in demand.
- Industrial/Warehouse REITs ($10,000): Support logistics, e-commerce, and storage, which tend to perform well.
- Retail REITs ($5,000): Select grocery-anchored or discount retailers that remain essential.
2. Defensive Stocks and ETFs: 30% ($30,000)
Defensive sectors provide stability and steady returns during a downturn:
- Consumer staples ETF ($10,000): Companies that sell essential goods like food and household products.
- Utility stocks ($10,000): Electricity, water and natural gas providers that generate consistent revenue.
- Dividend-paying blue-chip stocks ($10,000): Large, stable companies with strong balance sheets and reliable dividends.
3. Bonds: 20% ($20,000)
Bonds offer stability and consistent income, making them a safe choice during recessions:
- Government bonds ($10,000): U.S. Treasury bonds provide security and predictable returns.
- Municipal bonds ($5,000): Tax-advantaged investments that support public projects.
- Corporate bonds ($5,000): Bonds from well-established companies with strong credit ratings.
4. Cash Reserves: 10% ($10,000)
Holding cash provides flexibility and protection against unexpected expenses or investment opportunities:
- High-yield savings account ($5,000): Earns interest while keeping funds easily accessible.
- Money market funds ($5,000): Low-risk, short-term investments that maintain liquidity.
This portfolio example balances income, stability and long-term growth with REITs for real estate exposure, defensive stocks for market participation, bonds for security, and cash reserves for flexibility. By focusing on dividend-generating investments and recession-resistant sectors, investors could position themselves strategically to weather economic downturns and set themselves up for future growth.
Other Ways to Invest in Real Estate With a Small Budget
You can also diversify your portfolio with additional real estate investments. Besides REITs, here are five common ways you can invest in real estate without making a large downpayment:
- Real estate crowdfunding: Platforms like Fundrise or RealtyMogul allow investors to pool money with others to buy properties. Investments can start with as little as $500 to $5,000 per project.
- Real estate syndications: Private investment groups allow investors to contribute funds to buy rental properties or farmland. Minimum investments range from $10,000 to $50,000.
- Tenant-in-common (TIC) investments: This allows multiple investors to co-own a property while keeping separate shares. Some TIC investments require as little as $25,000.
- Partnerships and joint ventures: Investors can team up with others to split the down payment and costs of owning a rental or multi-unit property.
- Farmland investment platforms: Services like AcreTrader allow people to buy fractional shares of farmland, providing passive income from crops or land appreciation. Minimum investments start around $10,000.
Instead of buying a property alone, these options can help you get real estate exposure with smaller amounts of money.
Tips for Real Estate Investing During a Recession
If you’re interested in exploring real estate investments in a recession, here are three helpful tips to keep in mind:
- Consider location. Location is always an important factor in choosing real estate investments. If you’re looking at rental properties, get to know the area and take the temperature of the overall market. Ideally, you should be looking for rental property investments in areas where demand is high and rental rates would allow you to maintain the kind of profit margin you’re seeking.
- Weigh cash flow. Cash flow refers to how much money you pocket after deducting expenses from rental incomes. In a recession, it might be necessary to keep a larger amount in cash reserves to cover expenses as they come up, especially if inflation remains high.
- Compare financing options. If you need to finance an investment property, pay close attention to interest rates and loan options. Rates may start offer higher at the beginning of a recession and then drop as the Federal Reserve adjusts rate policy to encourage spending and borrowing. The timing for when you borrow can make a big difference in the cost of the loan overall.
It’s also important to do your due diligence and research any properties you’re interested in thoroughly. You don’t want to get into the buying process and find out the property has a sizable lien or the area where the property is located is scheduled to be rezoned.
If you’re looking at REITs and real estate crowdfunding instead of rental properties, consider the fees you might pay and the return potential for each one. Also, remember to take the holding period into account. With real estate crowdfunding, for example, your money might be tied up for five to seven years in a single property or handful of properties.
When investing in real estate stocks or ETFs, pay attention to commission trading fees and expense ratios, respectively. Also, consider the overall performance history of a stock or ETF and its risk profile to determine whether it’s a good match for your goals and risk tolerance.
Bottom Line
Investing in real estate during a recession could be a good way to diversify your portfolio. Researching the various options for real estate investing can help you decide which types of investments might be a good fit for your financial plan. If you have cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and healthcare. Stocks that have been paying a dividend for many years can also be a good choice, since they tend to be long established companies that can withstand a downturn.
Investing Tips
- Consider talking to your financial advisor about whether real estate investing during a recession makes sense for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’ll need to get a loan to purchase a rental property, consider what options you have. For example, you might get a conventional loan for a long-term rental but use a bridge loan to purchase a fix-and-flip property. Choosing the right loan is important for maximizing profits and ensuring that you can afford to make the payments if you can’t get a tenant right away or a fixer-upper takes time to sell.
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