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Recession could prove to be a great opportunity for real estate investing


It may seem like a story of the past, but the US saw record low mortgage rates in 2020 and 2021; At the same time, real estate investment skyrocketed. But the tried-and-true adage that real estate investing is a long-term proposition has never been more true than today as mortgage rates steadily rise. As property prices go down and a recession hits, the question is, is now a good time to invest in real estate?

Savvy investors understand that real estate is a consistent hedge against inflation. Low interest rates a year ago made real estate affordable, but the real estate market has adjusted by increasing home values. And now, as interest rates rise north of 7%, many buyers are finding themselves priced out of the market.

That situation presents an opportunity for rental property investors, who can increase rents as inventory dwindles, and buyers, with out-of-market prices, to seek temporary housing until interest rates fall. This model can lead to consistent passive income for investors.

But it’s still all about location, and investors in rental properties need to be conscious of the economic realities of the geographic area they’re buying from. “Investors need to be aware of unemployment in their investment real estate sector,” said the CEO of University Credit Union in Los Angeles. “You obviously want to hedge your bet that the tenant will be able to pay the rent as much as possible,” told Bankrate.com.

Price is an important factor to consider when investing in real estate. And while a lower purchase price can generate significantly more profit potential, it’s not the only factor to consider. Mortgage rates still significantly affect an investment’s return and are likely to skyrocket before a recession hits.

Outstanding returns in real estate tend to follow recessions, according to latest report from investment advisor Cohen & Steers Capital Management, Inc., a company with assets of $88 billion, of which $56 billion is real estate. The company believes that the current split in the real estate market is likely to generate strong returns in 2023 and 2024.

“Listed properties tend to lead private real estate in terms of both sell-offs and recovery during recessions,” Cohen & Steers said in its report. “Differences in the real-time valuation of listed real estate investment trusts (REITs) and private real estate can make a significant difference in the short term. By understanding the leading and lagging behaviors of the private and listed markets, real estate investors can strategize at different times between the two asset classes, looking to Take advantage of how the market is pricing in current conditions. “

For continued inflation, the report also said sectors with shorter lease terms, such as self-hosting and hotels, could quickly adjust rents to keep up with the pace. These industries exhibit more cyclicality and can act as a buffer against inflation.

The Cohen & Steers report claims the US is entering what it calls a “medium recession”, which is measured based on recessions over the past 100 years. “Our base case is that the actual domestic product globally falls between 2% and 3% and lasts about 12 months.”

However, the report is particularly upbeat on expectations of outperforming profits in the real estate sector after these downturns. “The result, emerging from this challenging period, could be some strong classic returns on both types of properties. However, real estate portfolio optimization can be enhanced by integrating both the listed and private markets.”

For alternative real estate investment opportunities, Cohen & Steers point to cell towers, healthcare facilities and data centers as emerging secular winners thanks to technological innovations in past few years.

Continue reading: Bezos-Backed Startup Lets You Be a Homeowner for $100

photo taken by Rohan Reddy above Unplug

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