How To Protect Your Real Estate Assets from a Possible Recession

Property owners got clobbered in the Great Recession of 2008, but that was the exception rather than the rule. Real estate typically weathers hard times well compared to other investments. Still, there’s always the possibility you could get squeezed if property values drop or if your personal or business income takes a hit. Whether you’re an individual homeowner with perhaps a second home or a rental or two, or you have significant investments in many kinds of real estate, here are a few thoughts about readying yourself for a recession.

Preserve and Increase Liquidity

A big recession risk is that your income will decline (either real estate rentals or unrelated income) and you’ll have trouble meeting mortgage payments or other expenses such as upkeep and taxes. You may be forced to sell property at an unfavorable time. Having cash, or assets easily converted to cash, helps you meet your obligations. In addition, there will be others eager to sell and bargains to be had, and if you have cash on hand you’ll be able to take advantage.

If you suspect hard times are on the horizon, consider some these options:

• Get rid of low-performing assets. This includes selling real estate that produces inadequate return or is at risk of depreciating. It might also be time to rebalance your non-real estate portfolio toward more recession-friendly assets.

• Defer major expenditures. Put off buying that vacation home or taking that expensive vacation. Don’t get in a position where you hold assets that are hard to turn into dollars.

• Be prepared to reduce your good tenants’ rent. They may be struggling too, and getting something from them is better than if they move out and give you nothing at all, or if you acquire problem tenants in their place. The goodwill you generate may pay off.

Own the Right Kind of Real Estate

All properties are not equal when the economy retracts.

• The most hard-hit are vacation rentals, industrial properties, office buildings and hotels.

• Apartments will generally continue to do well. Also multi-family units such as duplexes, triplexes, and multiplexes. In many parts of the country there are high occupancy rates and demand for your apartments could actually increase. Student apartments in college areas are another good bet.

• Self-storage units do well when families have to downsize and store belongings.

• REITs and crowdfunded real estate follow the same patterns. Those investing in apartments and multifamily dwellings are the best positioned.

• Invest based on cash flow rather than hoped-for appreciation. You may be in for a few years where cash flow is all you get.

When the next recession comes, it’s unlikely that real estate will bear the brunt, but that doesn't mean you can pooh-pooh the risk. However, if you have access to enough cash and own recession-friendly properties, you have a good chance of coming through in solid shape.