While the inflation rate has steadily declined since it peaked at 9.1 percent in 2022, the fallout from that peak continues to resonate. Economic growth stalled while prices spiked on just about everything from food to fuel oil.
It even reversed hiring trends. The tech sector, which had been hiring like mad, started mass layoffs. For those interested in building a real estate portfolio, things don’t look rosy for different reasons.
Low inventory has kept real estate prices high, predominantly residential real estate. So, the question for investors is how to build real estate holdings in a down market.
Work With a Good Agent
Working with an agent is a one-off transaction for someone looking to buy their first home. The odds are good that you won’t ever see that agent again. If you do, it will happen years down the road.
If you’re looking at real estate investing, working with a good agent becomes necessary. That relationship will, ideally, evolve into something more like a mutually beneficial partnership.
After all, the more properties you buy, the better the agent does. The better the agent directs you to the right kinds of properties, the happier it will make you. Everyone wins.
One of the keys to working with a real estate agent is narrowing down the exact kinds of properties you want them to find for you.
Income-Generating Investment Properties
One of the ways that people lose a bundle of money on real estate during an economic recession is that they hold a lot of property, but none of it generates any income. For example, let’s say you own a bunch of high-end homes you plan on selling.
Let’s say the real estate market loses a lot of ground in your area. Those homes instantly become less valuable even if you do sell them.
Income-generating properties tend to perform better in a down market because the rent remains due regardless of the economy. Rental properties can range from single-person homes to multi-family and commercial properties.
The kind of properties you pick will depend on both your budget and your interest in acting directly as a landlord. However, you can find property management services to handle essential landlord tasks.
Diversify
Diversification can mean a couple of things when it comes to your real estate portfolio. One type of diversification is the property type itself, as mentioned above. If you primarily own one type of property, investing in other types can help cushion things if the value drops for a specific property type.
Another type of diversification is in location. Granted, you typically want to stay in the local area, but local can mean different things. For example, consider expanding into local suburbs if you primarily invest in an urban area.
City property values don’t rise and fall at the same rates. Some neighborhoods gain value, while others lose value. Investing in properties across the area acts as a hedge against value changes in specific areas.
Build Local Knowledge
A surprising amount of real estate is held by people who live in another part of the state or even out of state. This is often a byproduct of someone inheriting property.
Someone grows up in Washington, D.C., but ultimately gets a job somewhere in Virginia. Twenty years down the road, they inherit a house from a parent. All that time away puts the new property owner at a disadvantage because they don’t know what’s happening locally.
Knowing what major construction projects are on the horizon or abruptly canceled can help you know what parts of the area may make for suitable long-term investments.
Knowing what parts of an area are in decline can also help you avoid investments that won’t pay off or will prove too much trouble.
Mind the Numbers
As much as real estate is about physical property, it’s also about numbers. You must keep a sharp eye on a few of them.
First things first, you must understand your own financial position. It should go without saying but never invest money that you cannot lose.
You need a good handle on how much outside funding you can realistically put together. Just as importantly, where is that funding coming from?
Hard money lending can work if you plan on selling a property within a year or two. You’ll probably need a traditional bank if you’re making long-term investments such as rental properties.
Do you have a bank that you usually work with? If not, is there a bank that will give you favorable terms for a loan?
You should have a sense of the return on investment you can expect and the timeline for that ROI.
Things to Avoid
No real estate investment comes to you risk-free. You must accept that any investment can potentially fail when you first start investing.
There are, however, types of real estate that traditionally do not fare well during economic downturns. A few common examples include:
- Hotels
- Vacation properties
- Retail
Hotels typically depend on tourists and business travelers. Those customers tend to dry up when the economy goes south. Vacation properties also suffer when the economy is bad because people don’t vacation as often or go as far afield.
Retail is more of a gray area, but e-commerce has made retail properties a riskier investment in the last few years.
Building Your Real Estate Holdings
Building your real estate holdings in a down market is feasible. You do, however, need to stay mindful. Find a real estate agent you like and trust to work with regularly.
Diversify your real estate portfolio to a bigger area or include other types of properties. Consider income-generating properties, for example. Boost your local knowledge to help you spot opportunities.
Always mind the numbers. Understand where the money comes from and goes. Avoid risky investments, such as hotels or vacation properties.
Brett McCurdy specializes in real estate in Kensington, MD, and surrounding areas. For more information, contact Brett McCurdy today.