As the world faces a global pandemic that’s causing uncertainty in the financial markets, real estate investing serves as a more secure alternative to investors during these trying times.
Investing capital into an investment property or real estate investment trusts or “REITs” are just two methods that investors can use as financial safe havens during a recession.
This is due to several factors. Plunging markets have triggered government intervention aimed at keeping the economy afloat during one of the worst financial crises since the stock market crash in 1987 known as “Black Monday.”
Banks now have the ability to continue lending in addition to lower interest rates being imposed by the Federal Reserve. This provides real estate investors with the financial breathing room they need to navigate the real estate market.
Financial Technology companies have carved out niches in the housing market that allow individuals to invest in real property by buying fractional shares of mortgage debt making real estate investing more accessible.
This form of investing also creates an alternative to typical savings accounts with higher returns offering rates upwards of 3%.
Why Real Estate Is A Secure Investment During A Recession.
The financial market has recently been subject to an increase in capital cushion and steeply reduced interest rates intended to goose the economy.
Real estate investors can utilize lower rates and secure investments in property while building diversified portfolios.
But this isn’t limited to purchasing homes and other properties.
According to Jim Egan, head of commercial real estate banking and senior vice president at Bryn Mawr Trust, "If you purchase right and understand your costs, a fix and flip or buy and hold can both be viable options during a recession.”
Long term real estate investments such as the buy and hold method have seen it through many of the past recessions with property ultimately increasing in value following an economic recovery.
How Investors Can Benefit From The Federal Reserve Buffering Financial Markets
In response to market strains created by mounting fears spurred by the spread of the Coronavirus, The Federal Reserve reduced interest rates to a range of 0% to 0.25%.
The Central Bank has also taken measures to bolster the economy by purchasing $200 billion in mortgage-backed securities over the coming months while picking up $500 billion in Treasury Securities in an attempt to avoid a complete failure of the financial system.
The reduction of the Fed’s benchmark rate to nearly 0% harkens back to the financial crisis in 2008 which was caused by a collapse of the housing market. The benchmark hovered around that rate for years in an effort to help the markets recover.
The housing crisis that occurred over a dozen years ago is what remains in the memories of many people who wish to start investing, causing them to shy away from investing in real estate.
However, the current financial climate could prove to create a prime opportunity for real estate investors to obtain property paying lower interest rates or by purchasing distressed properties at reduced prices.
This is based on the benchmark interest rate being significantly reduced by the Fed, giving banks the ability to offer lower rates while maintaining the same profit margins.
In short, this allows investors to negotiate more aggressively. The current state of the market has created buyer-friendly circumstances for those who recognize the potential of property investing in the face of a looming recession.
In times of economic turmoil, it can be difficult to identify the safest investments. The housing crisis that happened in 2008 has left many with a recency bias that can cause them to shy away from real estate investing.
However, with the current trajectory of the stock market, and the sagging confidence in investments such as mutual funds, real estate offers a more secure investment during the present financial crisis.