Are REITs a good investment in a recession?
REITs historically perform well during and after recessions | Pensions & Investments.
Traditionally, REITs have been well-positioned to take advantage of economic recoveries. The average outperformance of REITs relative to private equity real estate during recessions from the first quarter of 1978 to the third quarter of 2022 continued into the four quarters after the recessions.
Even with inventory levels driving up prices, investing in real estate during a recession could still result in significant long-term returns.
Historically, multifamily properties have been a source of stability for real estate investors. They provide a steady source of income through rent, and there is always a demand for occupancy. The risks associated with owning a multifamily property are much lower during a recession than a single-occupancy home.
Realty Income (NYSE: O) tends to be a low-volatility stock. After all, the company is a Real Estate Investment Trust (REIT) that specializes in triple-net leases to recession-proof tenants in mostly stand-alone locations.
He says: “Our analysis shows REITs perform very well historically in periods of high inflation. I could easily see global REIT returns in the low double-digits over the next 12 months – and if the economic situation turns out to be more positive it could be considerably more than that.”
Real estate usually performs well in inflationary climates; REITs are the most feasible way to invest. Adding global stocks or bonds to your portfolio also hedges your portfolio against domestic inflationary cycles. Another option is more exotic debt instruments like TIPS (inflation-adjusted Treasury bonds).
Cash: Offers liquidity, allowing you to cover expenses or seize investment opportunities. Property: Can provide rental income and potential long-term appreciation, but selling might be difficult during an economic downturn.
Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.
The value of homes will likely flatten and may even fall slightly, but it will probably not be a devastating amount. However, a recession may even provide positive benefits for the rental market, as it is likely to encourage more people to rent rather than buy a home.
Is it smart to buy real estate during a recession?
This decreased demand means less competition for homes on the market, which in turn means sellers who are more open to lowering their prices. So buying during a recession, if you are financially able to, may get you a better deal.
There are some strategies investors can use to minimize risk and maximize returns when investing in real estate during a recession. One strategy is investing in real estate debt. It offers lower potential risk and still allows investors to gain exposure to the potential appreciation of the underlying asset.
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. But the exact length of a recession is difficult to predict. In general, a recession lasts anywhere from six to 18 months.
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
Look for 1-4 unit properties that would be suitable for rental so you can generate consistent monthly income. Unless you have cash on hand or are willing to take on additional debt during a recession, properties that need minimal improvements and have long-standing tenants tend to have less risk.
As a result, some agents may see a significant decrease in their annual earnings during a recession or need to work harder to earn the same amount. In the end, being a real estate agent may be recessionproof because there will always be a need for this service, but being a successful one may be a lot harder.
But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.
Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.
REIT Stock Performance and the Interest Rate Environment
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
What is the best investment to beat inflation?
During inflationary periods, experts suggest making the most of your returns by investing in assets that have historically delivered returns that outpace the rate of inflation. Examples include diversified index funds, as well as carefully investing in things like gold, real estate, Series I savings bonds and TIPS.
Compared to other investments such as stocks and bonds, REITs are subject to various risk factors that affect the investor's returns. Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.
The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis. While cash investments -- such as a money market fund, savings account, or bank CD -- don't often yield much, having cash on hand can be invaluable in times of financial uncertainty.
Many people who owned stocks that went down a lot would have been OK eventually, except they bought on margin and were ruined. The best performing investments during the Depression were government bonds (many corporations stopped paying interest on their bonds) and annuities.
GOBankingRates consulted quite a few finance experts and asked them this question. They all said the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
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