Investing in real estate during a looming recession may seem like a bold move. To well-meaning friends and family, it may even seem reckless. Many people will advise you to wait for a better time, like when housing prices fall even further or the economy turns around. However, savvy investors understand that there is no perfect time. Instead, they carefully research prospective properties and make the best use of their resources. As it turns out, real estate can be a solid investment regardless of the market, even in a recession. Here are a few things you should know to give yourself the best chance of success.
A Recession can be the Best Time to Buy
You can never count on timing the market when it comes to real estate. Luckily, perfection is not required. All you need to enjoy fast equity growth is to buy during a downward trend, even if you don’t get the absolute lowest price. When you think about it, there is no better time than during rumours of a recession.
Successful people don’t tend to follow the crowd or back away from the market when everyone else does. Instead, they “run towards the fire,” often doing the opposite of what others are doing because getting it right doesn’t mean being perfect.
To a savvy investor, movement is the key. Even if prices drop slightly after your purchase, they will rise again. As the saying goes, they’re not making any more land. The population is growing, and housing will become even more in demand. With Canada’s new immigration targets, that may happen sooner than we think.
If you’ve ever thought about breaking into real estate as an investor, the timing couldn’t be better.
Now is an excellent time, whether you’re buying an investment property or your new family home. Here are some other posts that can help you take the next step:
- Can You Buy a Home With a Poor Credit Score?
- Is it Time to Leave the Guelph Rental Market Behind?
- Should You Look at Listings in a Termite Zone?
Interest Rates Are Not Everything
At the beginning of 2022, house prices skyrocketed at an unprecedented rate. Fierce competition made buying almost impossible, even if you had access to funding. Then in the early Spring, the market slowed to a crawl, and prices began to come down. What happened?
The Bank of Canada began raising the target interest rates, and buyers started to panic and put their plans on hold.
On paper, feeling alarmed about the new rates makes sense. Higher interest rates make borrowing more expensive, and the monthly payments can become challenging. However, successful real estate investing calls for some nuance, and interest rates are not everything.
Falling Prices Mean Lower Down Payments
Let’s consider the most significant deterrent that stops people from investing in real estate–the down payment. To purchase an income property, you need 20% upfront. There’s no getting around that. When the average cost of a house is $1 million, you have to come up with a minimum of $200,000 to make your purchase.
You can borrow against your equity to fund your down payment if you currently own a home. Otherwise, you’ll need access to cash through savings, investments, or non-repayable gifts.
When the price drops for any reason, the barrier to entry is lower because you need far less for your down payment. Imagine that house dips to $800,000. Now, you only need $160,000 upfront. That’s no chump change, but it’s $40,000 less than you would have needed when the market peaked.
High Interest Rates Aren’t Forever
If you chose a variable interest rate, you might feel like kicking yourself now as less and less of your payment goes to the principal of your loan. However, the rates can and likely will go down again once the economy stabilizes. When that happens, your monthly payments will also decrease. Even better, the value of your property will increase, meaning your equity, net worth, and purchasing power will be higher. Your carrying costs will fluctuate as an investor, but rental prices rarely go down.
With a smart strategy, you can succeed as an investor no matter what the market is doing. Here are some other resources to help:
- How An Experienced Guelph Real Estate Team Can Help With Your Investments
- Seven Reasons Why This Could Be Your Best Opportunity to Buy a Home in Guelph & the Tri-Cities
- Questions To Ask Potential Property Management Firms
The Rental Market is Booming
Housing prices are dropping, but that is not the case in the rental market. In fact, rental prices are higher than ever with no sign of slowing down. It comes down to simple supply and demand. Fewer people are buying, but they still need a place to live. This means more people are renting.
As the owner of an income property, you have plenty of prospective tenants to choose from. High rental costs make it easier than ever to generate a positive cash flow and create passive income.
A Strategic Approach is Essential
What do you need if “perfect timing” isn’t what it takes to succeed as an investor? A strategic plan will help you avoid the pitfalls many investors fall into. While you want to be prepared to act quickly when the opportunity arises, you still need to proceed with some degree of caution. The best place to start is by looking at your own financial resources to see where you stand.
- Do you have enough cash saved or equity in your property to afford a down payment comfortably?
- Will you maintain the property yourself or hire a management company?
- Do you have enough cash reserves to cover the monthly costs if you don’t find a tenant right away?
- How much is the average rent for similar properties? Is it enough to cover the monthly costs of owning and maintaining the home?
- What is your support network? Do you have relatives or friends that can help reduce your risk by investing with you?
What to Look for in an Investment Property
Once you’ve created your plan and your finances check out, you can begin the hunt for the right investment property. What should you look for? Think of the old real estate adage: Location, location, location! An area with high demand from tenants is ideal. For example, you might find a condo or townhouse near a local university where students are searching for rentals.
The next question is, what condition is the property in? If you want to generate positive cash flow, you’ll need to find a home with a solid foundation where you will not require substantial repairs or renovations. However, you can overlook a few cosmetic flaws, especially if it means the owner is willing to negotiate a lower price. Every concession lowers the barrier to entry and makes it easier to turn a profit and build your equity.
How a Seasoned Real Estate Team Can Help
A local real estate team with investment experience can be your single best resource when scouting out your next income property. They’ll know the micro-markets inside and out and can help you find something within your budget with a high chance of success. Many agents are investors themselves and can give you access to contractors, lawyers, mortgage brokers, and everything else you will need to grow your portfolio and create lasting wealth for your family.
Are you ready to begin the search for your next investment opportunity? We are experts in the Guelph, Kitchener, Cambridge and Waterloo areas and would love to help you find that “just right” property. It all starts with a simple conversation! Reach out today at email@example.com or call our office at 519-826-7109 for a free consultation.