Property Investing 101: Before And During A Recession

The last recession saw housing prices plummet and foreclosures boom. As more and more economists forecast a recession in the next year, there are likely scads of potential buyers wondering if now is a good time to invest in property.
Is investing during a recession a good bet?

The Great Recession of the late aughts was unique, according to Matthew Gardner, the chief economist at Windermere Real Estate. Housing prices typically stay pretty static through a recession.

“Housing was the reason why we had a recession in the first place (in 2008),” Gardner said. “I went back and looked at median home values through every recession since the 1950s and what happens is, other than the last one, housing values just plateau, they flatline.”

Despite believing that housing prices won’t collapse – meaning you won’t be able to find stellar deals on the market – Gardner thinks that housing is a pretty good investment during a recession.

“Everyone is chasing any kind of return for their cash,” Gardner said. “Given that borrowing is remarkably cheap, yeah it can be [a great investment] because where are you going to get any other form of return?”

“Equity markets are likely to get pummeled as is generally happens, money markets are going to make you a tenth of a point, that’s going nowhere and the yield on 10-year treasuries isn’t going to break 2 percent, that’s less than inflation,” Gardner added.

If you opt to go the route of investing in a property during a recession, it’s important to target the right markets, according to George Case, a real estate agent at Warburg Realty.

“Purchase in areas that are consistently in demand, regardless of market fluctuations,” Case said. “While those prices do fluctuate, they are the first to rebound as the economy strengthens and is the first to experience spikes in pricing in seller’s markets.”

“Team with a reliable realtor and keep an eye on the pricing of buildings you have been historically interested in,” Case added. “Your realtor can provide a thorough analysis of pricing year over year and in comparable markets. A discussion of current economic conditions with a firm understanding of pricing history will allow you to ‘strike while the iron is hot.’”

Svetlana Choi, a broker also with Warburg Realty, believes a recession is a great time to invest in property.

“If you are willing to hold onto it then it will gain in value,” Choi said. “Properties that are not overpriced and considered good value, even now, will not drop in value as much.”

“But properties that are ambitiously priced, and particularly the high end, will see even greater reductions,” Choi said. “There will be NO appetite for over-paying on any level.”

Will short-term rentals continue to be profitable?

Recessions typically impact the hospitality industry significantly – as more people are afraid to part with discretionary income and opt to save, rather than travel – but short-term rental operators like Airbnb and Vrbo are both relatively nascent with the former launching right as the last recession hit.

Conventional wisdom would lead us to believe that these short-term rentals would still be a decent investment as they’re typically cheaper than a hotel stay.

Tendayi Kapfidze, the chief economist at LendingTree, said the impacts would be localized to the specific markets and that, as is always the case, individual management will be important to ensure the property isn’t a money pit during a recession.

“It’s likely travel spending will decline in both frequency and price point and lower cost lodging may steal some share from higher-priced alternatives,” Kapfidze said. “As with most property investments, individual management and execution would be key.”

One potential issue could be hotels and hospitality companies lobbying even further to crack down on short-term rentals, to protect their assets during a recession, Gardner said. “Hoteliers do not like the fact that they could be losing business,” Gardner said. “They are fighting massively at the legislative level. They’d love to eviscerate them. It won’t happen, but they’re going to try as much as they can to limit the losses the hoteliers are seeing.”

Could there be more profit in investing and renting?

With so much economic uncertainty and lower market growth, many people will likely not have the means to come up with a down payment for a home, which will create a lot of forced renters. Conversely, many will just be afraid to make a significant investment and will be in a wait-and-see mode.

Kapfidze believes renting will increase as a result of the recession, which could lead to more competition for renters and ultimately more revenue for rental properties.

“Low rates will definitely benefit those who are financially prepared to own or invest in a home but renting will increase as incomes are constrained and become more volatile for others,” Kapfidze said. “For investors, there could be benefits on both the cost and revenue sides of the equation.”

Gardner echoed Kapfidze’s sentiments, noting that consumers usually suffer from a bit of paralysis during times of economic uncertainty. Given that, some existing renters will wait to buy until they see the economy starting to grow again, or they become more confident in their employment situation.

Improvement vs. Maintenance: How to explain the difference…

Here’s a handy list that’ll help you distinguish between basic maintenance and genuine home improvements.

Homeowners looking to sell often seem confused over what constitutes an improvement versus deferred maintenance. It’s an important distinction because only genuine improvements over what is generally expected in a sellable home can be monetized in a list price.

I hope that this list will help clarify the differences and help you to explain to your clients what they can and can’t price higher for.

1.Painting the exterior…

Deferred maintenance: Painting the exterior of your house because the paint was peeling off. The condition of the exterior of the house is an issue for any buyer who sees peeling paint, rotted eaves or gaps in siding.

Fixing these issues and painting the exterior is not an improvement, and homeowners need to tend to the basics to avoid price reduction conversations that would inevitably arise during an inspection.

Improvement: Painting an exterior that is already in good shape and selecting an updated color palette or adding architectural elements such as a gazebo or patio cover.

2. Painting the interior…

Deferred maintenance: Painting the interior of the house to address areas where walls show excessive signs of wear and use. Baseboards, doors and walls need to be free of marks, dirt and other impacts from usage.

Improvement: Painting the interior of the house with contemporary, neutral colors to cosmetically attract a buyer. It has been shown to add value depending on the colors used. Painting out oak cabinets, built-ins, baseboards, doors, door casings, and stairs white or high gloss black would also update the house for today’s buyers.

3. Roofing…

Deferred maintenance: Replacing a roof that is damaged by hail or age. The roof damage needs to be repaired or replaced as the damage would come up in an inspection, and the house might not be able to close with a lender until the issue was fixed.

Improvement: Replacing a roof and using a higher-quality material that has a longer life. Adding solar panels to a roof could also add value when marketed as an eco-friendly improvement.

4. Carpeting…

Deferred maintenance: Replacing worn, torn, soiled or stained carpeting. A seller cannot expect to get a good price for their home when it looks like it has been lived in hard and the flooring is damaged.

Age and use is part of living in a home, and when carpeting is in poor condition, it impacts the buyer experience and the price for the home.

Similarly, stretching and cleaning wrinkled carpeting is not an improvement and brings no added value to the house. It does make for a better buyer experience when looking at the house online and in person.

Improvement: The house can be marketed with “new carpeting” and the quality of the carpeting can be considered an improvement if it is a higher grade than what is typically used by sellers fixated on budget.

5. Kitchen and bathrooms…

Deferred maintenance: Repairing kitchen and bath tile countertops, cleaning grout, recaulking tubs and sinks, and replacing a shower floor that is beyond help to get clean.

Improvement: Replacing kitchen and bathroom countertops with granite, quartz or marble adds value to homes. If the existing counters are in good shape and not totally out of date, replacing them with a higher quality material or stone is an investment that can be monetized.

6. Floors…

Deferred maintenance: Existing wood floors in a house that are scratched and worn getting refinished or restained. No value was added.

Improvement: When the existing floors are wood or tile and are in good shape, a seller who replaces them with on-trend wide plank hardwoods or other contemporary material is adding value to the home.

7. Windows and screens…

Deferred maintenance: Cleaning windows and repairing screens that are damaged.

Improvement: Replacing windows with vinyl insulated brands adds value to the house.

8. Landscaping…

Deferred maintenance: Fixing landscaping that is overgrown, lawns that are burned out and dead, trimming back trees and shrubs that are overgrown, and fixing the irrigation system that is not working.

These are things the owner should have done as part of ongoing maintenance for the property and had in working order while they were living in the house. A buyer is going to expect these things to be in working order as part of the purchase.

Improvement: Adding pavers, stained or stamped concrete patios and walkways, adding other garden elements such as trellis or covered patio. These are things that can be marketed as added value items in the sale.

The bottom line:  When a homeseller says they want to get every penny they put in preparing the house back in an offer, that expectation is not realistic.

Savvy agents can use some of the updating to market the property and let buyers know the house is up to date on maintenance concerns and then use the marketable improvements to set the purchase price.