There are definitive advantages to buying real estate during an economic downturn. Whatever the cause of the downturn, it will eventually lead to an oversaturated housing market. An oversaturated market means that the price of real-estate will fall, which means that you can buy property cheaper than when the real estate market is on an upswing. However, there are always risks associated with buying real estate, and those risk increase during a recession. You need to understand your risk profile before deciding if investing in real estate during a downturn is a wise decision. We will discuss both the potential risks and benefits of real estate purchases when there is a market glut.
The pros of buying real estate during an economic downturn
- The price—The price of real estate drops when it is a buyers market. An economic disaster for one person can be an economic boon for another, as long as you are a savvy investor who understands the market in your area.
- Real estate is an excellent way to diversify your investments and create an income stream—real-estate can generate income while increasing in value. If you are interested in buying commercial or residential real estate to produce rental income, buying during an economic downturn that drops, prices can be a smart financial move.
- Stability—Real estate reacts much more slowly to fluctuations in the market, adding stability to your investment portfolio. Though a significant economic downturn will hurt demand, interest rates remain near an all-time low. For most of the country, housing markets remain tight, meaning that real-estate is not prone to dramatic swings.
The cons of buying real estate during an economic downturn
- Overextending yourself—Even if your job seems stable, there can be unexpected consequences during times of national or global economic uncertainty. Using your liquidity to invest in real-estate can leave you vulnerable if your financial situation changes unexpectedly. Whether you are purchasing a home to live in or rental property, real estate is a substantial investment that reduces your financial flexibility.
- Competition with other bargain hunters—Real estate markets can heat up during a financial downturn due to investors turning their attention to real estate. Before you end up in a bidding war with another investor, know the pricing averages over the last several years for the area that you are considering. If the prices have been overinflated, a modest drop in prices does guarantee that the area can sustain the inflated prices over the long-term.
- Buying without doing due diligence—You need to work with a professional realtor who understands the market in your area. Realtors only make money if you buy, so keep that in mind when interviewing one you hope to work with. Always have the property thoroughly inspected by a reputable and licensed home inspector. You may be buying a property to renovate and flip when the market hits the next upswing, or perhaps you are ready to buy a home. Whatever your motivation, a missed problem with the property can spoil what seemed to be R great deal. From unseen water damage to foundation problems, many investors have had their investment sour when expensive to fix issues that are found after closing on the property. Even with a competent inspector, there are some problems that are impossible to see until you start the renovation, so if you are buying property to do a complete renovation, be prepared for unexpected costs.
Goals and personal finances matter more than the market when buying real estate
Whether you are buying a home or an investment property, you can always find great deals in almost any market. Instead of timing the real estate market, it is much smarter to time your investment to your own financial preparedness. If you have a healthy emergency fund, and a significant amount saved for a down payment, then you need to decide if you want a move-in ready home, needs minor cosmetic repairs, or if you feel confident enough to take on a significant remodel. Whatever your goals, one of the most important things to look for is a home priced well with motivated sellers. There is no foolproof way to determine if a seller is motivated to negotiate a great price, but there are some flags that might indicate the seller would entertain a substantially lower price.
- Look for properties that have been on the market for at least a couple of months. If it is because the price is above market value, you should probably move on. However, if it because the home has excellent bones, but ugly paint or unattractive carpeting, those are easy fixes, and the seller may be motivated because they have had few showings and no interest.
- Pay attention to houses that are completely empty, indicating the seller has moved on and maybe carrying two mortgages. They might be anxious to shed the extra mortgage and motivated to sell.
- Ask your real estate agent about highly motivated sellers they are working with, and check out those properties. There are numerous reasons sellers might need to sell quickly, and some of the best deals on the market are found when sellers need to sell fast.