Top Tier Ways to Hedge Your Real Estate Investment Against a Recession

You are probably already aware that a three-bedroom apartment in East Detroit and a one-bedroom apartment in San Francisco do not cost the same. In fact, the difference can be quite staggering. But how do you know where to invest? How do you recognize the right market and avoid losing everything during a recession?

Let’s find out!

Trends in the US That Can Affect Your Investment

There’s been a slow-motion change going on in the US in the past decade. By that, we mean that America is becoming a renter and landlord nation. Some statistics even claim that between six and ten million rent-your-households have been created in the past ten years. So far, no recession in history has managed to make so many new rent-your-households in a single decade.

However, at the same time, there’s a supply-demand imbalance. On the one hand, we have certain markets across the US with an oversupply problem. There’s an influx of new buildings, so people have to give a lot of concessions, such as three months of free rent. But at the same time, in other areas, demand is so high that owners are able to raise their rents.

One example of this is in Kansas City. In the last decade, rents in Kansas City have been going up fast, by 4%, 5%, or even 6% a year consistently.

However, parts of the city of Kansas City, you could get yourself a classy apartment, in a class A area, for 2-3 months of free rent. This is due to competition and an oversupply of new builds.

A Demographic Shift

Another thing to pay attention to is that today’s average renter is a Millennial. Generally speaking, millennials are a very specific generation burdened by student loans. At the same time, older generations are moving to city apartments instead of small homes as expected.

All in all, several demographic trends are giving a tail blend to multifamily construction, and we should be aware of them. But this sudden shift to multifamily isn’t that surprising. If we look at how real estate moved in the past, we can notice that we had industrial as the top-rated at one point. Then it switched to multifamily, but industrial became popular again after a couple of years.

So, judging by the fact that we’ve had industrial as the top-rated for the past two years, it was only natural to assume that the shift to multifamily was in order.

But if we look at the rents for the past twelve months, we can notice the average growth of over 3% per year. Also, we can see the eight years of expansion, which is pretty unbelievable. All of that makes us believe that the US is changing to become a renter and landlord nation.

How Can You Protect Your Real Estate Investment?

The demand is strong at the moment, but you need to be careful when choosing where to invest. Here are some strategy tips.

How to Choose a Market?

Five real estate demographics have the most significant impact on profits you can earn from real estate.

  1. Population growth
  2. Income growth
  3. Home price growth
  4. Job growth
  5. Reduction in crime

4 growth factors and one reduction factor control everything. But where can you find information on all these metrics?

First off, you can find population growth information on Google. Next, the information on every city’s home price growth, income growth, and crime information are available on a web page called city-data.com. In the end, you can get the up-to-date job growth information for every city in the US on the Department of Numbers website. Due diligence is key when investing in new markets.

Where to Invest

Perhaps avoid buying real estate downtown, where there are all the class A buildings, a lot of competition, and high concessions. Instead, go ten to twenty miles outside because such an area drives specific kinds of investors and renters — those who can afford living there. So, even renters know that having an apartment in that area leaves you with, for example, $1800 a month, even if you get the first three months for free.

It's Time to Start Looking Into the Tertiary Market

Perhaps avoid buying real estate downtown, where there are all the class A buildings, a lot of competition, and high concessions. Instead, go ten to twenty miles outside because such an area drives specific kinds of investors and renters — those who can afford living there. So, even renters know that having an apartment in that area leaves you with, for example, $1800 a month, even if you get the first three months for free.

Is It a Good Idea to Invest In Development?

Investing in development today is much riskier than it was seven years ago. Still, the demand for investors in the right markets is high.

Take a look at Salt Lake City, Utah, for instance. Such a market has a huge demand, but it does not have enough apartment complexes for some reason. So, there’s a supply-demand gap. Will it be difficult to raise money for new construction? Yes. Will it be worth it? Also, yes.

But before you get into development, just remember that it is quite different from real estate, and it requires a lot of knowledge to succeed. Still, you can do new construction if you discover innovative methods to finance it in order to minimize risk.

The Key Take Away

In order to protect your investment from the recession, you need to find a combination of solid demand and quality tenants. We consider solid demand to be the one that stays the same throughout your five-year process.

Also, to see how a combination of high demand and quality tenants looks like take a look at our past investment cities and see how it stacks up against the five metrics mentioned above.

When it comes to real estate, numbers always beat the gut feeling. Don’t get emotionally attached to a property. If you want to protect your investment, you need to use trusted metrics that will show you clear data. That way, you will know where to invest and when to pass.

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