Investing in a Recession
There’s a lot of chatter on the street about an upcoming recession. These things can’t be predicted with 100% accuracy, but it always pays to be prepared, either way. One of the best ways to protect your wealth is to invest wisely in the months preceding a recession and during the time of the recession. But depending on your currently portfolio, you might want to consider different strategies. Should you invest during a recession? If so, what are some investment types that will help you safely navigate through a recession with as few losses as possible?
What’s the Difference Between a Recession and a Depression?
A recession is characterized as a slowdown in the economy. Recessions are considered less severe than depressions, but for those who suffer from the consequences, the differences can seem like a moot point.
Some economists differentiate between a recession and a depression by the length of time it lasts. However, the last recession lasted 18 months between December 2007 and June 2009, and one of the more recent depressions also lasted 18 months between January 1920 and July 1921.
Depending on whom you ask, the main difference between a recession and a depression is the level of contraction of the GDP, or Gross Domestic Product. In the recession of December 2007, there was a contraction of -5.1%. In the depression of 1920, there was a contraction of -38.1%. You can compare and contrast more historical recessions and depressions to see that it’s actually the contraction of the GDP that seems to make the difference between a recession and depression.
How Does a Recession Affect Real Estate?
When there is a deadlock, such as a shortage of resources or a failure of one of the key facets of an economic system then recession can occur. In today’s world the economy is based on expansionist growth; because human ambition is predicated on growth, our economy is based on it, too. This is evident since GDP contraction and recession go hand in hand. There are several signs and symptoms that also go along with a recession. It can cause housing prices to drop as there is a lack of buyers and/or demand for real estate. This may occur in the event that the average citizen has less spending power, they lost their jobs or when lending rates rise, or all of the above.
In the Great Recession of 2007, millions of people actually lost their jobs. The perfect storm of rising home prices along with unbridled lending practices eventually led to a disaster that you are probably acutely aware of.
Where to Invest in a Recession?
You should only take investment advice from a licensed professional. But there are some ideas for investing in a recession that are worth bringing to the attention of your financial planner for their consideration.
Turnkey rentals often make good options for investing during a recession. Housing prices may rise during a recession. That, along with increased stress on family budgets could lead to more families wanting—or needing—to rent instead of buy. Turnkey rentals may also be a good option for investing during a recession because in many cases the turnkey rental company bought the property when housing prices were lower or at least more reasonable. Instead of trying to find and buy a cash flowing rental property yourself in a bad economy, you could take advantage of a turnkey rental company’s existing inventory to maximize your ROI.
Private Money Lending
When the economy turns sour, the stock market generally takes multiple hits. If you’re tired of being at the whim of Wall Street, you could consider private money lending, where you’re investing in Main Street. Private money lending is considered safe investing during a recession because you get fixed returns on a pre-determined length of time. The caveat is that you should only do private money lending when you and your fellow investors have first lien position. This protects you in the event of a loan default so you have legal recourse to take possession or take other steps necessary to recoup your investment. American Real Estate Investments has private money lending opportunities with first lien position that you may be interested in. Just contact us if you’re interested in learning more about them.
If you’re concerned about the rumors about an upcoming recession, you’re not alone. Your fellow real estate investors are likely already taking steps to protect their wealth. With the right action plan, there’s no reason why you can’t get through it, too. For more information about turnkey rentals or private money lending, please contact us today.