Investing in Commercial Real Estate During a Recession
August 15, 2022
The United States has gone through a period of recession every 10-20 years and this period is relatively brief. After the recession, the economy tends to move into an expansion cycle and you need to choose investments that continue to pay off in all economic cycles.
The biggest reason to consider investing in commercial real estate during a recession is the fact that its price movements tend to be more stable than any other asset class. This is because the asset has a low correlation to the other asset classes like stocks and bonds.
It brings relative price stability which might seem like a drag on portfolio performance in times of intense growth but it can also work as an anchor in times of economic contraction.
Benefits of CRE Investing
There is one major benefit of CRE investing during a recession, it will continue to generate steady dividends for you. It is often believed that there is a sales decline in tenant business during the recession due to which they cannot pay their rent. But businesses associated with discretionary spendings like clothing and entertainment fare worse because this is a segment where consumers will reduce spending. Such essential businesses suffer less and rebound faster when the expansion cycle starts. Hence, there is less risk of a tenant defaulting on the rent payments.
How to Plan Ahead
If you are ready for recession-proof real estate investing, here are a few steps to get you started on the right foot.
Have a cash reserve
Several investors make the mistake of not having enough cash reserves for difficult days. You enjoy cash flow generation during the good times and are happy to take it home for other purposes but you often forget that the negative consequences of a rising vacancy on the property could affect your cash flow.
Refinance the property
Investors who have financed the property more than 3 years ago should consider refinancing it. Your current interest rate could be higher than what you will get today and a lower interest rate will make the property resilient in case of a market downturn.
Focus on capital repairs
Do not make the mistake of putting off any repairs on your property. Now is the time to make the necessary repairs instead of waiting to do them when the recession hits.
Do a vacancy breakeven analysis on the properties
You can estimate the chances of vacancy using the current rent roll and operating expenses. Identify what vacancy rate will lead to the cash flow equalling the mortgage payment. Be prepared with the right numbers in your hand so that you can plan your finances well.
CRE Income Fund is a great choice during tough economic periods like today and you won’t have to worry about planning for a recession since CRE Income fund will manage everything for you.