With the American economy trying to dig out of the quagmire caused by the COVID-19 pandemic, it might seem counterintuitive to consider investing in any type of real estate. However, home prices increased during three out of the last five recessions, which means now might be a good time to consider investing in rental real estate.
In 2008, tens of thousands of homeowners got soaked when the housing bubble burst. However, many of the same real estate market indicators that led to the 2008 financial meltdown are not lurking around the corner to dampen the enthusiasm of real estate investors in 2020 and beyond.
How to Invest in Rental Real Estate in 2020
With interest rates at historically low levels, if you have the cash to invest, you should consider putting the cash into one or more investment properties. That is, if you follow four steps to keep your investment on rock-solid ground.
Location. Location. Location
Where you invest in a rental property is the most important decision you can expect to make. We’re not talking about uprooting your family and investing in a rental property located on the other side of the country. The key is to target neighborhoods in the community where you live that have a strong economic base, from minimal housing turnover to a low unemployment rate.
Diversity in Industries
One of the keys to achieving a low unemployment rate is a local economy that has a diverse base of industries. As the decline of the steel industry showed us, a community that relies on one industry to generate jobs is susceptible to a sharp decline in economic statistics. Search for a rental property that is located in a neighborhood where different industries thrive, preferably a nice blend of old-school factory jobs and small upstarts that drive the digital economy.
One of the key factors for maintaining a stable housing base is the quality of schools. The property management experts at Utopia Management say that 7 out of 10 prospective tenants ask about the school district when shopping for a place to live. You want to invest in a rental property that is located in a highly rated school district. Although renters typically move in and out at a faster rate than homeowners, a reputable school district has the power to keep tenants living in the same rental property for years to come. The quality of a school district depends on many factors that include the credentials of the teachers and the testing standards implemented by the school district.
Focus on Asset Appreciation
Yes, generating a healthy cash flow matters when deciding whether this is a good time to invest in rental real estate. However, asset appreciation should be your primary financial objective. Real estate investing is a great way to protect financial assets because of the length of time an asset is held. If you decide to put your hard-earned cash to work in the rental real estate market, you’re making a long-term investment with your eye on increasing the value of the property.
Keep a Few Other Factors in Mind
Investing in rental real estate during a recession sparked by a pandemic requires a thinking outside the box type of business approach. Gone are several of the conventional business principles that define sound real estate investing. In their place, we present a few other factors to consider before signing a contract to purchase a rental property.
Finding Renters is Going to Be More Difficult
It’s not just about social distancing; it’s about attracting quality tenants when millions of Americans have lost jobs. Working with a highly rated property management company can remove the burden of promoting a rental property, as well as screening potential tenants. If you choose to run a rental property yourself, you need to approach tenant screening a bit differently than you would during a period of robust economic growth. You should be more flexible when it comes to considering rental applicants.
As far as social distancing, technology makes it easy to interact with prospective tenants, without having to meet them in person on site.
Section 8 Housing Thrives During Economic Downturns
We’re not advocating that Section 8 housing becomes the bread and butter of your rental property portfolio. However, during a recession, investing in a Section 8 rental property acts as a hedge against other rental property investments. The reason is the federal government subsidizes the rent for Section 8 housing tenants, which means you receive a guaranteed flow of rental income every month. If a tenant cannot take care of a portion of the rent, you still receive the federal government’s share of paying the rent.
Think Long Term
A recession makes it difficult for many tenants to stay current on rent. The last thing you want is to lose tenants because of their inability to take care of housing costs. If you decide this is a good time to invest in rental real estate, you should consider reducing the rent to keep your property as close to full occupancy as possible. When the economy begins to rebound, you can set new rental rates as your tenants begin to earn more money. Once again, the lesson here is to view investing in a rental property as a long-term financial plan.
The Bottom Line
A recession does not mean all rent payments come to a halt. You still receive a steady stream of cash from tenants. Owning a rental property remains one of the most stable investments you can make. It certainly is a more stable investment than taking the roller coaster ride delivered by investing in the stock market.
If you use smart investment strategies, putting cash into a rental property during a recession can pay huge dividends down the road.