In the past few weeks, we have started reading interesting articles on the future of the US economy, mainly dealing with whether trying to rein in inflation will bring about a recession. Since we write this blog for real estate investors and home buyers, and since there are some warnings of a looming recession, if not this year, maybe next (for example, read Bill Conerly's November 2021 article "No Recession In 2022—But Watch Out In 2023" in Forbes magazine), the question that has sprung to mind for us is:
Should you invest in rental property now or wait?
Our short answer is: Go for it!
The basics of a recession
A recession is defined as a period of temporary economic decline during which trade and industrial activity are reduced. The economic indicator that signals a recession is "a fall in GDP in two successive quarters." Recessions usually come from having a weak demand, but as Bill Conerly points out, supply problems can also trigger one.
In 2022, maybe even 2023, the demand side will still be strong: "consumers have plenty of money, thanks to past earnings, stimulus payments, and extra unemployment insurance. Businesses, too, have plenty of cash on hand. Not only have profits been good, but the Paycheck Protection Program gave nearly $800 billion to businesses." (Quoting Mr. Conerly)_can we get the link to the quote?
On the supply side of the equation: "the supply challenge we have is not an actual reduction in materials available, just insufficient materials to meet the stronger demand."
So, people worry about recessions because "the economy is weak and uncertain during that time." And a weak economy brings with it a more conservative approach to investments (generally speaking) because you do not know how long the recession will last.
To be somewhat cynical about it, a recession always seems looming, and we will not know when it starts until we are in one. So, if you are thinking about investing in a rental property but wonder whether you should wait for the recession to be over, let us be clear about one thing: no one can predict the future, and there are no guarantees for success. However, based on our many years of experience making Hard Money Loans in Houston, AMI Lenders can provide you with helpful and valuable guidance.
Quoting Mr. Conerly: "Can a recession be completely avoided in the next few years? Theoretically, it's possible. The people at the Fed are smart and knowledgeable, but the task is too difficult for mere mortals." So yes, we might be heading straight for a recession in the US economy. As a real estate investor, how should you face this situation?
Investing in a rental property in the face of a recession
Should you worry about falling rents? A usual consequence of a recession is that prices and salaries come down (or there are fewer employed men and women, so purchasing power comes down). So as a landlord, you might be worried that rent levels will also come down, reducing your cash flow, and making you have a hard time meeting your mortgage payments. But an opposite thing can happen to rents. During the 2008–2009 Great Recession, rents held up as some homeowners were forced to become tenants. Suppose you have a rental property of good quality in a recession. In that case, you could be faced with having a "steady cash flow" as opposed to a "contracting cash flow" mainly because of how things might play out.
Should you wait for property prices to fall? Another usual consequence of a recession is that property prices come down, and you could purchase the same property for a discount "in the future." But let us analyze that for a minute. You probably know the maxim for investing in the stock market: "do not try to time the market." The same applies to what we have been discussing: "do not try to time the looming recession."
Recently, a blogger in Quora said that now would be an excellent opportunity to get deep discounts on a rental property. But you'll need to time the recession perfectly and most likely require having more cash at hand. Warren Buffet has argued vehemently in the past years, there is an expensive trade-off with having money at hand to buy during a recession. You must sit on low-yielding cash for an unknown number of years to wait for that discount opportunity to emerge finally. During that time, you're foregoing the 5–7% returns plus cash flow and property appreciation while you sit on your hands.
So, if you have the cash right now for a down payment, put it to work for you in well-planned rental property investments, and do not wait for uncertain future discounts.
Investing in Rental Properties is for the long run, that means through periods of economic growth and periods of economic downturn. A well-positioned and well-managed rental property will deliver substantial inflation-beating returns to help you build your net worth.
Suppose you are considering investing in a rental property. In that case, the prospect of a looming recession should not deter you (in our humble opinion). Make sure that your business plan makes sense and allows for a downturn scenario that you are ready to weather.
If you have decided to purchase a rental property, AMI Lenders is the place to start. We are one of Houston's fastest closers. We invest the time and resources to become a reliable financial ally and adviser. We fund our own loans and can move as fast as the law allows. Borrowers in Houston will also have a hard time finding lower rates for hard money or private loans than we offer. We want our customers to succeed and take advantage of the financial opportunities provided by real estate investments. Visit our website today and fill out an application for a loan backed by a rental property.
For over 30 years, AMI Lenders have been providing financing options to individuals in the Houston area. If we aren't able to assist you, we'll be happy to direct you to someone who can.
Contact us for any questions or apply online!