Recession-Proofing Your Investment Portfolio

Since 1950, the US economy has suffered 9 major recessions. All recessions were preceded with an inversion of the yield curve for the US treasury bonds.  The yield curve is the spread between short and long-dated treasury bonds. An inverted yield curve is an indication that the short term rates are higher than long term rates. It is also the first sign of a shrinking economy and a reliable recession indicator.

This inversion recently took place on August 27, 2019. It may take up to 34 months for a recession to hit. 

What does this mean for real estate investors?

An economic slowdown is a natural process of any market cycle. Active real estate investors during the last recession benefited phenomenally. There were discounted properties everywhere with potential for huge profit margins.

Consider the following steps today and prepare for the expected market shifts.

• Get access to funds

If you have risky investments, this is the time to sell and have more liquidity. Do not over-leverage as you may need access to funds. Make sure you are in a capacity to buy properties to add to your rental portfolio when the time and the price are right.

• Buy right

See that you invest in properties that allow cash to flow regardless of the market. Rental properties are good long term investments. They can survive a recession because there is always an influx of renters.

You should avoid buying properties that need fixing during this period. You may end up spending money fixing a property that will attract less return.

• Build financial relations

During a recession, banks and lenders are not enthusiastic about giving out loans. You should start to build financial trust early to gain an advantage when you need a line of credit. If you are a real estate investor, now is the time to look for connections with long term lenders.

Recession Proofing 101

Introduction

Recession occurs in a business when there is a decline in economic activity. It causes a decrease in incomes, sales, and production. Due to these reasons, it is important to come up with strategies to prevent and solve recession in order to retain and attract more investors. These strategies are called recession proofing strategies. An asset, industry or company is said to be recession-proof it does not decline in value during the recession.

Possibility of recession

It is inevitable, therefore, there is a possibility that most businesses stand a chance of a recession in the next twelve months. It therefore advisable to come up with strategies to help prevent as well as solve recession before and after it occurs.

As a real estate investors, one has to have knowledge of recession proofing as well as prepare to prevent making a bad decisions which may lead to losses. Some businesses stand a higher risk of recession than others. For those that experience high recession, the impact is faster and lasts longer or even leads to permanent financial damage.

Strategies

Recession proofing involves preparation. This ensures that in case of a recession one enjoys financial stability. This can be done through the following:

1. Coming up with an emergency savings plan. These ensure one is able to run their daily activities, for instance, enough money for house utilities. One should have a backup saving account for expenses.

2. Avoid or pay off high-interest loans as well as minimize on debt. It is important to avoid unnecessary debts which are overwhelming tiring during payment. Work within your budget.

Investment is a process that involves making of financial decisions. At times one tends to avoid some decisions that may lead to recession. It is therefore important to weigh the available options in order to come up with the best solutions for recession proofing.