September 19, 2022
How Can Rental Properties Help Investors Weather A Recession?
Everywhere you turn, whispers of a recession are becoming more prevalent. With worries about possible economic downturn, many investors are seeking alternative places to park their capital. The stock market is seeing more frequent bearish sentiment, and some observers believe cryptocurrency has already entered its second winter.
Since the start of the pandemic, people have been eyeing the housing market as a tried-and-true form of investing. Those who already have rental properties know that they provide a form of recession-proofing for their yearly returns. But just how well do they perform?
Negative Stock Market Returns
Before we look at rental properties, it makes sense to look at other forms of investing in comparison. Wall Street is the traditional venue for wealth management. Since its inception, people have used the stock exchange to store their wealth in ownership of different companies through stock ownership. However, the stock market is highly susceptible to negative consumer and market sentiment, which can lead to extreme volatility of prices. We can point to the Great Depression, Dot-com bubble, and the 2008 recession as several examples.
Through August 29th, 2022, the S&P 500 is down 15.2% year-to-date. For the last twelve months, the index is down 10.7%.
In line with these negative returns seen by exchanges, bitcoin is down approximately 71.3% from its high on November 7th, 2021, and Ethereum has officially completed its merge into Eth 2.0. This marks a further downturn in its profitability for the near future as crypto miners have stalled their operations with the coin’s move to proof-of-stake. While crypto is seen by some as a good store of value, it’s just as prone to negative sentiment and potentially more volatile.
How do rental properties provide insulation against inflation?
Is it possible to be recession-proof using rental properties? After significant price increases coming out of the pandemic, home prices are now starting to soften. Alongside rising mortgage rates, real estate prices may be next in line to see continued downward momentum.
According to Barron’s, the housing market is officially in recession. They state that “In a matter of months, the pandemic’s red-hot housing market has chilled.” However, they follow up saying that “The slowdown will contribute negatively to the economy but could present opportunities for some buyers who can stomach high prices.”
How can this be?
While home values begin falling in step with recession, potential home buyers may take a step back and wait for prices and rates to return to normalcy. They will be looking for temporary housing in hopes of saving money while having to increase spending on items such as food and transportation. Rental properties step in as a means for these people to prepare for future home ownership
According to Fortune, From 2008 to 2011, as prices of houses and condos fell significantly, rents actually increased by around 3.2% a year. The cost of mortgages had an inverse relationship to decreasing home prices. In their words, “Families can cut back on vacations and restaurant meals in tough times, but they still need a place to live. They’re more likely to delay plans to buy, opting to rent a home or apartment or renew a lease instead.” They also elaborate that “rental growth is beating inflation by 2 points.”
How can you start your real estate investing journey?
For most real estate investors, hard money loans provide them with a quick and efficient way of obtaining funding for properties. Hard money lenders are able to provide loans based upon the value of the asset, not a borrower’s income and financial history. Opposed to conventional lending, these hard money lenders have more flexibility to work with borrowers as their source of funding comes from private investing.
If you’re looking for a hard money loan, consider Bay Mountain Capital as your lender. Since 2008, we’ve been operating as the premier hard money lender in Texas and have expanded to Tennessee, Georgia, Oklahoma, Alabama, and Florida (with more regions being added each year!) We treat our borrowers as our partners, and your success is our #1 priority. For more information on how we can help you with your investing goals, check out our terms and apply today.