Typically, the success of a real estate investment is tied to the strength of the economy. However, during a recession savvy investors will consider adjusting their investment strategies to meet their new reality.
Through the right investment strategies, your portfolio can be successful in virtually any type of economy.
Unlike many asset classes, such as retail and office which are closely tied to the economy, there are many recession-resistant investment opportunities that historically perform well even during an economic downturn. Here are some examples of recession resistant investments:
• Syndications - Benefit from the Advantages of Scalability
• Mobile Home Parks - Growing Demand with Restricted Supply
• Medical Office Buildings - Favorable Demographics Drive Growth Even in a Downturn
• Multifamily Properties - One of the Best Performing Assets in the 2008 Recession
We’ll explore each investment opportunity below.
Investing in Real Estate Syndications
While a syndication isn’t so much an asset class as a type of investment structure, it’s still worth highlighting its advantages. So what is a syndication anyway? A syndication is simply the pooling of money from various investors who come together and invest in one real estate project opportunity, portfolio, or a single property.
Basically, a real estate syndication is a joint venture amongst multiple investors. They pool their capital, resources, and expertise together to acquire and manage a property that they otherwise couldn't afford individually.
Under a syndication, the sponsor is solely responsible for acquiring and managing the property. So, individuals join real estate syndications as limited partners. Overall, your role as an investor will be to contribute capital, and often times you'll begin making passive income from your investment almost immediately.
Since syndications typically focus on larger commercial properties, they benefit from numerous economies of scale. When combined with the right asset class, they perform better than their smaller counterparts that can't leverage the efficiencies that come with scalability.
Investing in Mobile Parks
The second strategy we'll discuss is mobile home investing. Interest in Mobile Home Park (MHP) investing has seen a considerable uptick in recent years due to its reputation for strong cash flow and lack of sophisticated competition.
Traditionally, investors flock to single-family homes or apartment complexes when building their investment portfolio. While these traditional forms of investing are unquestionably profitable, there are several advantages unique to mobile home investments.
Demand for mobile homes inside well-managed parks has steadily increased in recent years.
Rising costs of construction have made it impossible to build truly affordable housing, and as home prices continue to rise, incomes haven't kept pace. That's left mobile homes as the last remaining option for many low-income tenants seeking affordable housing.
What's more, as demand for mobile homes continues to grow supply remains relatively stagnant. Most communities won't allow new parks to be built, which restricts supply to those parks that are grandfathered in. As many Americans are laid off and displaced due to the Coronavirus pandemic, demand is expected to grow even more, and sometimes the only solution is a mobile home park.
Many MHP investors tout the benefits of focusing on parks with tenant owned homes, thereby simplifying operations and eliminating maintenance costs. However, in some scenarios there're often opportunities to investing in park-owned homes as well.
Many opportunities in MHP investing can be found in parks that are mismanaged and have empty lots. Finding tenants willing and able to move a home into a park can be challenging in the best of times, due to the high moving and installation costs. Realistically, in today's market, very few tenants are moving their trailers into MHPs like they might have in the past.
Therefore, you're more likely to fill vacant space in your park if you buy and own the trailer yourself. By installing parked-own homes, you're turning a vacant space that earns no income into a profitable rental unit. The big plus is cash flow is typically higher as opposed to only generating income from the lot, as long as you have a strong management system behind you.
Investing in Medical Office Buildings
The COVID-19 pandemic has hit the office leasing, construction, and retail sectors of real estate pretty hard. And, while it's true that the medical office building (MOB) sector has not been completely spared, key indicators show that the MOB sector will remain healthy after the Coronavirus pandemic dies down. According to CBRE, the U.S. medical office vacancy rate was at an all-time low of 10.3% through mid-2019, which means that rents were already at record levels "before corona."
Due to the combination of an aging U.S. population, expanded medical insurance coverage, and an increasing need for outpatient care, there will be a higher demand for health care and medical offices. After the pandemic dies down, there will undoubtedly be a backlog of work due to closed offices and rescheduled appointments, creating a need for medical office staff.
The favorable supply-and-demand environment facing MOB investors is likely to last well into the future.
Investing in Multifamily Property
Historically, multifamily investments perform better than most asset classes during recessions, preserving member capital and offering a good rate of return with lower risk. That's because the need for multifamily housing typically grows during recessions, due to homeowners being displaced and forced back into the rental market. In fact, multifamily assets were one of the best performing asset classes during the 2008 recession.
Cash is king with multifamily real estate investing, and during a recession cash flow is even more critical. The more income a property can generate, the easier it is to cover its mortgage payments and other expenses. Investing in properties with stable cash flow well above the properties debt obligations greatly reduces an investors exposure to risk. So long as the property can comfortably ride out the economic storm, the investment should perform well over the long term.
Recap
Overall, while the Coronavirus pandemic will undoubtedly disturb some sectors of the real estate industry, all is not lost. By focusing on recession-resistant investments like those discussed here, investors can preserve their wealth and even profit no matter the market conditions.