Real Estate Investing During a Recession

The Royal Bank of Canada predicts a recession in the first quarter of 2023. The past two quarters have been volatile, to say the least, for both Canadian and US markets. Economists suggest we keep an eye on the manufacturing industry as it’ll likely be the first to be impacted. 

As we witness substantial rate increases, volatility in the stock market, issues in employment, and a cooling real estate market, many investors may wonder how to weather the storm. Just because the real estate market appears to be cooling off from a residential buying and selling standpoint doesn’t mean you should pull away from real estate investing.

Here are the 2 top reasons why real estate investing during a recession could be the safety net you’re looking for. 

Further diversifying your portfolio

Any time you can diversify, you protect yourself from drops and volatility in one particular sector. If you’re largely invested in manufacturing or tech in the stock market, having real estate investments can help protect you if the predicted recession causes a decline in those markets. 

Combating the effects of inflation

A significant benefit to real estate investing is that inflation and the value of real estate typically move together. As inflation rates dwarf some investment returns, real estate moves more in tandem with the rise and can help you compete against inflation and retain more value in the long run. 

What to Expect from real estate investing in 2023

Demand is still high for real estate development within Canada. A lack of housing supply, rising need due to immigration, and a development delay of 2-3 years thanks to covid and material shortages, mean we can expect development and building to continue. The floor is not expected to fall out of the real estate market. However, how we invest in real estate will change in 2023. 

This next year will experience a shift away from a “flip” style of real estate investing. Because of the appreciating environment and the demand in the real estate market of 2021 and 2022, this method of real estate investing made sense. Buying a home, completing some renovations and upgrades and flipping it for a profit wasn’t too hard because of the high demand. As houses lose value and sit on the market longer, this is a more risky real estate investment strategy. 

As interest rates increase, but salaries don’t increase in proportion, most real estate investors will also have to shift away from rental properties. From a cash flow perspective, the only rental properties that will make sense are high-density buildings and projects. A single-family home or even a duplex will not provide enough cash flow in many markets right now to make it worth it. Most individuals won’t be able to purchase these multi-dwelling properties. Investors in 2023 will need to look for a way to invest in real estate that doesn’t lock them into a physical property and shifts the focus from their personal debt.

Investing in real estate without owning a physical property means looking at a REIT or a mortgage pool managed by a Mortgage Investment Corporation (MIC). These options allow you to diversify your portfolio into an alternative asset class, compete with inflation, and capitalize on the steady increase in real estate value without the risks of physical ownership during a recession. This method of real estate investing is easier to get started as the cost to enter is substantially lower than the downpayment on a physical property. 

Remember, wealth is made in down markets. When markets are down, you have a greater opportunity to make money as things begin to rebound in the coming years. If you have the time to wait out a down market and a recession, now is the time to invest in numerous avenues and alternative assets to diversify further. Curious about how a mortgage pool can help you withstand a recession? Jordan on our team is here to help. Get in touch today.