Inflation is higher than it’s been in decades, signs of more supply chain problems to come are increasing, and the stock market is down over 20% on the year. It’s looking like we may be close to a recession, but that doesn’t man you should panic.
We tell stock investors that short-term pains should largely be ignored when you have a long-term investment focus. The same is true for real estate investing. If you own good, profitable properties with reserves and have a sensible loan-to-value, short-term hiccups in the market shouldn’t give you an ulcer.
That said, no one’s perfect. It always helps to build your portfolio in a way that helps you sleep at night — especially when the economy seems to be turning in the wrong direction. Here are a few real estate investment options that can be good plays during a recession.
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1. Existing properties
The first step is to do all that you can to keep holding your existing properties. Any property that you’ve owned for five or more years likely has built up a ton of equity and could give you a nice cash influx to sell, but it also probably has a great cash-on-cash return.
The real estate market is in a purgatory period. Rates are up and mortgage originations are down, but prices haven’t started making any material moves down yet. There is still enough demand, and housing inventory is still low.
That means you have two choices: Sell now and buy a new property while the market is likely close to a peak, or hold on to your investment, continue collecting cash flow, and save for the opportunity to buy when prices are lower and rates stabilize.
As long as you have a good loan-to-value on your property, short-term drops in real estate prices don’t matter.
Assuming you choose not to sell now, the investment you can make is in your existing properties. Add amenities where possible. For example, if you own properties with large yards, add a storage shed to the yard that can be used for an additional fee. If you have older appliances, invest in new ones. Anything that can make your property more attractive and boost your rental income if the rental market slows will help.
2. Farmland
Farmland is one of the most inflation-resistant real estate investments. As prices go up, people will choose to conserve some items and even stop purchasing others. But they won’t stop buying food. If you own land where corn, soybeans, or wheat is farmed, your cash flow should rise along with inflation.
The key here is finding someone to farm the land. It isn’t easy. Not only do you need someone competent — you don’t want harvest season to come and discover that half your crop is dead — but you want someone who is trustworthy and understands the market.
In fact, you may be better off buying farmland REITs, or real estate investment trusts. There are a few notable REITs that own farmland and lease it to farmers. They do all the hard stuff, and you get a huge dividend each year.
3. Office/warehouse space
E-commerce growth that started prior to the pandemic and then was accelerated by it has fueled growth in industrial real estate over the past few years. Warehouse space is needed more than ever.
Office/warehouse space is even better because you increase your flexibility. If you can find a tenant that can lease the entire space and use it, great. If not, you can parcel out the office space to different tenants and the warehouse space to even more. In a worst-case scenario, you can turn the warehouse into self-storage spaces and use the office yourself to write off expenses.
Meanwhile, e-commerce will likely continue to grow, and demand will continue to rise for warehouse space. Companies that once used just half of their warehouse will find it a lot more cost-effective to sell and downsize. Industrial real estate prices should continue to rise with increased demand, and when the market turns back around, there will be no shortage of tenants.
4. REITs
For some investors, the only way they’ll be able to sleep at night through a recession is with a hands-off approach: Leave it to the professionals. I don’t blame them. If this sounds like you, consider adding a few REITs to your portfolio.
Instead of buying farmland, buy a farmland REIT. Instead of buying an office/warehouse, consider an industrial REIT. You can even buy REITs for subsectors that most individuals would never be able to invest in by themselves, like infrastructure or timberland. REITs will give your portfolio the added diversification that it needs to get through a recession.
This content was originally published here.
