How Passive Investors Can Invest During A Recession

Four things to understand to not just protect yourself during recession, but to grow your portfolio through it. Find out what the best of the best know and how they invest during a recession.

Recessions can be a terrifying time for people in the financial space, and it can make real estate investors extremely worried or even put some in really big trouble, but I want to talk about some ways you can protect yourself during a recession and continue growing.

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Recessions can be a terrifying time for people in the financial space, and it can make real estate investors extremely worried or even put some in really big trouble, but I want to talk about some ways you can protect yourself during a recession and continue growing.

There are 4 key points to understand during recessions:

1. Understand how recessions work and how long they last: The average recession lasts 10 months, so understanding that if you’re able to weather the storm for about 1 year can already lighten the burden of a recession looming.

Real estate markets are sped up and slowed down by interest rates which are also used to navigate recessions. Historically, the fed has raised rates to slow down the economy (and push us into a recession) and then pulled rates down to get us out of the recession (speed the economy back up).

So, if you’re able to pull through a year of recession it’s likely we’ll see rates pull back down and the market start to normalize again. (source)

2. Alter your expectations and business plan: Recessions typically mean fewer transactions, but more meaningful ones (more on this later). It could be healthy to pull down your goal for how many deals you want to add to your portfolio to avoid getting too aggressive.

Understand that savvy investors will decide to hold or pull their properties off market because they understand the first point, that rates will typically fall at the tail end of a recession and if they can hold off until then, they will.

Business plans may also be altered with a new debt environment. Bridge loans or short term loans may have such aggressive rates that investors are forced to put up cash for rehabs instead of pulling out excess loans to fund a rehab which changes deal affordability and buying power due to significantly more cash needed up front.

3. Rethink your exit timelines: Being forced to exit during a recession (likely due to a balloon payment) is one of the worst things a real estate investor can face.

Savvy investors understand how the markets have reacted historically and can use this information to help them time their exits, or delay an exit.

Rising rates slow down the economy which lead to recession, then the fed is forced to lower rates to stimulate the economy.

When rates drop, values increase, and savvy investors win. Understand that on the other side of recession, historically has brought lower interest rates.

4. Hold onto cash: In the second bullet point I mentioned there will likely be fewer transactions, but more meaningful ones. This is because most investors who do not need to sell their properties during a recession or period of high interest rates, won’t.

Meaning, those properties get pulled off the market meaning most properties on the market have to sell. This provides the biggest opportunity for investors who are still active in the market to capitalize on properties. Hold onto cash for great opportunities.

Summary

To capitalize on investing during a recession, first, understand how recessions work and how long they last for. Then, alter your business plan and portfolio expectations during a recession. Understand how savvy investors ‘time the market’ by understanding the cycle of interest rates as they relate to recessions. Lastly, hold onto cash to capitalize on the forced sell opportunities.