Recessions cannot be avoided, that much is certain. However, as a prudent investor, you shouldn't let it stop you from growing a robust portfolio. Financial success isn't solely determined by market conditions but rather by how you choose to adapt your strategy to thrive. With each passing month, it's becoming increasingly evident that the real estate market is changing. Record-high home prices and a rising interest rate environment mean fewer people can afford homes. With fewer sales taking place, home prices are beginning to fall. However, short-term distress should largely be overlooked when you are focused on long-term investing. For investing in real estate, the same holds true. If you own profitable properties and execute specific strategies, short-term hiccups in the market shouldn't be a worry in the long run.The following article will reveal the ins and outs of recession-resistant real estate investing – helping you build your real estate portfolio in a way that helps you sleep at night. What is a Recession?A recession is a persistent and significant decline in economic activity characterized by falling gross domestic product (GDP), a decline in real incomes and rising unemployment. Recessions occur when economic output, employment and consumer demand are all negatively affected. Recessions are regarded as an inevitable part of the business cycle – or the predictable cadence of expansion and contraction that occurs in a nation's economy.A number of variables affect when the economy enters a recession officially. However, a simple rule of thumb is that two consecutive quarters of negative growth in GDP indicate a recession. Recessions may last as little as a few months; however, the economy may not recover and reach its previous peak for years. Main Causes of a RecessionRecessions have different causes and effects, many of which cannot be anticipated or prevented. Here are four common causes of a recession:Deflation: Deflation occurs with a persistent decline in prices over time. As prices decrease, company profits fall, and some companies may cut costs by laying off workers. If deflation continues to get out of control, production may decrease. Less production may lead to lower pay, which causes demand to drop. A decrease in demand means people and businesses spend less, which undermines the economy. Inflation: Inflation refers to a steady increase in prices over time. Inflation isn't always detrimental to the economy, but excessive inflation is a dangerous phenomenon. Central banks tend to raise interest rates to slow the economy with the goal of lowering inflation. Higher interest rates raise the likelihood of a recession, which can result in layoffs, fewer employment opportunities and reduced consumer and corporate spending, among other effects seen in a slowing economy.Asset bubbles: Investors can become overly optimistic in a strong economy, leading to emotionally driven investment decisions that irrationally inflate stock market, cryptocurrency and real estate prices – leading to asset bubbles. However, when these bubbles eventually burst, panic selling can crash the market, causing a recession.Excessive debt: When individuals and businesses take on too much debt, it can lead to an enormous build-up of risk in the financial sector. The cost of servicing the debt may rise to a point where borrowers can not pay their bills. This situation can eventually lead to debt bankruptcies and defaults that cause the economy to collapse.How to Build a Recession-Resistant Real Estate PortfolioAs the real estate market looks to take a turn in the wrong direction, many investors are becoming increasingly nervous about the volatility of their assets. The good news is that you can protect yourself during an economic downturn. Here are a few factors to consider when building a recession-resistant real estate portfolio.Factor in Risk and YieldDuring recessions, banks tend to relax their lending requirements and generally extend credit at very low rates. However, prudent investors will know to consider the risk and yield before opting for credit. Generally speaking, minimizing your debts is the best practice during a recession.Increase LiquidityLiquid assets provide you with greater flexibility during a recession. Even if your revenue source is interrupted, having quick access to cash allows you the freedom to pay your debts and payments.Investors with underperforming assets might want to think about selling now, while capital gain rates are low and prices are high. Capital can then be redeployed into properties with the best risk-adjusted returns such as self-storage investment funds – the only commercial real estate asset type to produce positive returns during the Great Recession of 2008. Increase Cash Flow and Reduce DebtFocusing on cash flow is a crucial strategy to employ during a recession. Even if property values decline in the short term from higher interest rates, recession-resistant properties such as self-storage can continue to provide solid cash flow regardless of the economic cycle.It also is important to reduce debt during a recession. Recessions can offer great opportunities to reduce large loan balances amid low interest rates. DiversificationDiversification means allocating your investments strategically among different asset or asset categories to mitigate risk. It can be thought of as spreading your eggs across multiple baskets. Diversification can protect your portfolio by reducing industry-specific and enterprise-specific risk and can generate higher returns in the long run. Real estate portfolios can be diversified by investing in different geographic regions and various types of real estate and by spreading investments across riskier real estate investments against less-risky ones. For example, investors who invest in residential properties may diversify by investing in commercial properties, vacant land or office buildings. What a Recession-Resistant Real Estate Portfolio Should IncludeSeveral real estate investment options can be smart plays during a recession. Here are a few of the best investment opportunities available.Real estate investment trusts (REITs): REITs are companies that finance or own income-producing real estate across a wide range of sectors. REITs are the perfect option for investors that want a hands-off approach through a recession. If you want to leave it to the professionals, adding a few REITs to your portfolio could be an excellent choice. For example, instead of buying an office, consider an industrial REIT. Farmland: Farmland is widely regarded as one of the most inflation-resistant real estate investments. People will save money on some things and even cease buying others as prices rise. However, people will never stop buying food. If you own land where soybeans, corn or wheat is farmed, your cash flow should stay consistent regardless of market conditions.Self storage: Self-storage provides investors with a predictable income stream, low operating costs and low maintenance compared to other types of real estate assets. For an average storage facility, the breakeven occupancy rate to service stand debt is roughly 45%; however, for office and commercial spaces that percentage can be 65% or more. Recession Proof Your Portfolio with Real Estate Overall, real estate can be a fantastic investment opportunity to take advantage of in a recession – it is a natural hedge against inflation, providing recurring income and appreciation in asset value over the long term. When building a recession-resistant real estate portfolio, it is important to take into account considerations such as cash flows, risk and yield, diversification and reallocation of investment capital to assets that are recession-resistant such as self-storageFrequently Asked QuestionsAReal estate is arguably one of the best asset classes to invest in during a recession; however, financial success is not guaranteed.
AReal estate opportunities with strong cash flow potential, low maintenance and sturdy value propositions tend to do well in a recession.
ARecession-resistant properties refer to properties that don't decline in value during a recession or decline less than the broader market.