I’m a big believer that multifamily real estate is a recession resistant asset that everyone should be considering as an investment. As we’re writing this in November of 2022, there’s lots of talk of a possible upcoming recession. In fact, over the last 10 years, there’s constantly been talk of a looming recession. But as an investment minded person, the idea of sitting on the sidelines whenever the media starts shouting “doom and gloom!” is NOT a winning strategy. You’d never invest in anything.
Instead let me explore why some asset classes, like multifamily real estate, have proven to be recession resistant over the last several recessions.
Housing is an Essential Need
In tough times, people may tighten their belts and reduce unnecessary spending. Those expensive restaurants and spa days might be some of the first items to cut for a family that’s feeling the pinch. But housing will probably be among the last items that a family will cut when reducing their spending. In fact, after COVID-19, the increase in remote work seems to have made home even more important to most American families. They’re not just coming home to sleep, but they’re spending their entire day at home, together.
Not Enough Supply in USA
The U.S. is currently in the middle of an extreme housing shortage. This includes homes for sale AND for rent. This article states that the current shortage is anywhere from 1.6M to 3.8M homes, nationwide. This shortage leads me to expect increasing rents and demand for our rental units, resulting in increasing income.
Real Estate is Easy to Leverage with Bank Loans
Of all the loans that a bank gives out, my opinion is that commercial apartment real estate has got to be among their favorite. There’s a tangible, income-producing hard asset backing the loan, so their perceived risk is relatively low. Banks are often willing to fund an 80% or less of the purchase price without asking for personal guarantees. The asset is often good enough for them. This means that with $200k, you could go out and buy a $1M property. This leverage makes a 5% increase in value into a 25% return on investment. Leverage is very powerful!
Real Estate Actually Benefits from Inflation
By investing in leveraged real estate, you can put yourself on the winning side of inflation. Values increase, rents increase, and you get to pay that loan down with devalued dollars in the future, which effectively is a reduction in payment. All along, your largest expense (the loan payment) is fixed and won’t increase.
Real Estate is a Non-Liquid Asset
Now real estate isn’t PERFECT. One of the major drawbacks is that it’s not liquid. If you invest with me and 6 months later come back and ask me for your money back, I won’t be able to do that for you. The money is in the deal. Similarly, when we do decide to sell, it’ll take some time. You can’t just sell a deal with a few clicks of a mouse, like you can with stocks. However, this illiquidity turns out to result in less volatility in the real estate market. Prices of apartment buildings are much slower to increase and decrease and this means that you are very unlikely to lose huge amounts of value overnight the way that stock investors do so often.