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Recession Prep 101: Investing in Real Estate During a Financial Crisis

Mindy Jensen
9 min read
Recession Prep 101: Investing in Real Estate During a Financial Crisis

It’s never fun to navigate stormy times—but recessions are just as much a part of investing as sunny days. Smart real estate investment strategies will keep you steady, despite the rough waters of a financial crisis.

This roller coaster start to 2020 might make you anxious about your investments, but the experts at BiggerPockets know exactly how to weather an economic downturn. Here’s what you need to know about today’s economy, including how to manage your existing investments and where to put your money next.

Mapping the 2020 Global Financial Crisis

An unprecedented global pandemic, the novel coronavirus—also known as COVID-19—has ground almost every nation and financial system on earth to a halt. What began as an outbreak within isolated regions in China has spread across the globe, growing exponentially. More people have now died from COVID-19 in Italy than in China, despite Italy being on lockdown for weeks.

Graphs representing the stock market crash caused by the Coronavirus

There is currently no vaccine and early data show it to be extremely transmittable. Mortality rate estimates vary, with current case fatality rate estimates hovering around 1.4 percent. The virus disproportionately affects the elderly and those with existing health conditions, especially autoimmune disorders.

The U.S. crossed 10,000 total infected persons on March 19th, accumulating 40 percent of that total in just 36 hours. We are still quite “behind the curve” on accurate data; we won’t know how widespread the virus is in America for a couple of weeks. We also don’t know how well our national healthcare infrastructure can handle shortages in protective gear, respirators, and ICU beds. This is due to several main factors:

  • Coronavirus testing kits are in woefully short supply. Most people have to wait days to receive a test and another three to five days for the results.
  • The long incubation period lasts up to 14 days, or possibly even longer.

Because we don’t know when we’ll hit peak levels of infections, we can’t know how long the economy will be running at the drastically reduced level we’re seeing now. Logic dictates that some metro regions will have larger community outbreaks than others, but when it comes to interstate commerce, travel, layoffs, and industrial production supply chains, a problem anywhere in the U.S.—especially in its largest cities, like New York City, which is currently on lockdown—becomes a problem everywhere. The effects ripple and are felt by all.

As Larry Summers, former Harvard president and NEC chair under President Obama, put it recently, “Economic time has been stopped, but financial time has not been stopped.” We can seclude ourselves for a few weeks or months and our economy will “be there waiting for us,” financial time doesn’t pause. Rent and mortgage bills don’t stop. Credit card bills don’t stop. Suppliers don’t stop needing to get paid. Taxes are still collected.

It’s a different type of economic shock than what usually kicks off a recession. In essence, the world needs to limit economic activity in order to slow the spread of COVID-19.

In short, nobody’s going anywhere and doing much of anything. It’s an otherworldly standstill—and we don’t know how long it will last.

Does Coronavirus Mean the Next Recession Is Imminent?

We are most certainly headed for an economic crisis. That is, for all intents, not up for debate anymore. Our current fiscal quarter, Q1 of 2020, will likely be considered the recession’s official start date.

LEARN MORE: What is a recession?

The National Bureau of Economic Research is the “official scorekeeper” of recessions. They have some discretion over what officially constitutes a recession, but the generally accepted definition is two consecutive quarters of declining economic output, as measured by gross domestic product (GDP).

An economic recession is a natural byproduct of the business cycle, which acts like a wave. There are peak periods, where GDP growth is at its highest, and valleys when GDP growth declines, the economy experiences negative growth, and a recession occurs. Why is the business cycle like this? Economies are made up of individual players, and individuals are prone to periods of greed, stagnation, optimism, and fear.

graphics for REI during a downturn guide 01

Expect to feel the most economic pain in Q2 of this year—or April 1 through June 30. There will be a massive shortfall of economic output, simply based on the lack of travel and lodging, entertainment, eating, and social interaction. St. Louis Federal Reserve Bank President James Bullard recently estimated that U.S. GDP could fall by as much as 50 percent in the second quarter of 2020—and the unemployment rate could rise to 30 percent.

In fact, nearly every economist and investment bank now predict a global recession in 2020. Goldman Sachs estimates a 6 percent drop in U.S. GDP in the first three months of the year, followed by more than 25 percent cut to GDP in Q2.

The economic consensus now is that the U.S. and the rest of the world are not just seeing a market correction. Instead, we’ve entered a recession that could be deeper than any we’ve seen in our lives. We most likely will not see a resumption of growth until 2021.

What Is Happening to the Stock Market?

The stock market in the United States is falling faster and steeper than at any point in modern history—the S&P 500 fell 30 percent in less than one month, entering into a bear market. The Dow Jones Industrial Average made a “death cross” in late March, meaning its 50-day average fell below its 200-day average. That’s often seen as a portent of worsening economic futures. To see a similar stock market crash ripple through the financial markets on Wall Street, you’d have to go back to the Great Depression era.

The U.S. government is working quickly to provide relief to affected Americans. The Federal Reserve pushed through not just one but two emergency rate cuts in March. As a result, overnight discount rates—used by large banks for short-term borrowing—dropped to zero percent.

A woman holds a red umbrella on a fishing pier during a storm.

That’s right. Zip. Zero. This zero-interest-rate policy is a drastic action, last taken at the depths of the housing crisis-led recession of 2008. It’s like turning a water faucet all the way to the left. It’s a maximum push to motivate lending and growth.

The government didn’t stop there. On Monday, March 23rd, the Federal Reserve committed to buy unlimited amounts of government bonds and mortgage-backed securities, promising to use its “full range of tools to support households, businesses, and the U.S. economy overall.” The Fed sees the writing on the wall: “It has become clear that our economy will face severe disruptions,” they say.

This unprecedented move in scale and scope will increase the Fed’s balance sheet through what is called “quantitative easing”—economists’ fancy term for how the government injects money directly into the economy by allowing banks to swap assets for cash. The Fed used a similar device to spur growth while the global economy recovered from the 2008 recession.

What Economic Stimulus Packages Can We Expect?

While the central bank’s monetary policy responses attack the problems in credit markets, Congress is working to provide sweeping fiscal stimulus. Multiple massive coronavirus stimulus packages are on the table; the first package was passed in the Senate on March 18. It sets aside funding for free coronavirus testing, expanded food security programs, and paid medical and sick leave for small businesses.

A larger, more expansive bill to address the economic fallout is working its way through Congress now and would allocate more than $1.5 trillion to help stem the economic slowdown.

Even though $1.5 trillion sounds like a huge number, it’s important to realize just how big the U.S. economy is—we generated $20 trillion in GDP last year. If the estimates of some medical experts are correct and Americans have to practice “social distancing” for several months, including travel bans, school closures, and all large gatherings shuttered, we could easily lose $3 to $4 trillion in economic output. That’s real dollars that aren’t being paid out to workers—and thus aren’t being spent.

LEARN MORE: The BiggerPockets Guide to Coronavirus Relief Programs

Ben Franklin with sports a shiner (black eye) and a band-aid on the face of a US One Hundred Dollar Bill (C-Note) as an illustration of the weak dollar.

A third economic package being assembled by the U.S. Treasury Department would allocate $500 billion for two rounds of cash payments directly to individual taxpayers. The first payment would be made around April 6th, and the second payment on or around May 18th. These cash payments would be tiered based on household size and administered by the IRS.

The Treasury Department is also seeking $300 billion in emergency small business loans in addition to a $50 billion bailout for the airlines and $150 billion for other hard-hit industries like travel and leisure.

The Department of Housing and Urban Development (HUD) is joining municipalities and states across the country in efforts to keep people in their homes and apartments at this time, despite the decreased consumer cash flow caused by the skyrocketing unemployment rate. The Federal Housing Administration (FHA) is instituting an “immediate, 60-day moratorium on foreclosures and evictions for single-family homeowners with FHA-insured mortgages.” The Federal Housing Finance Agency (FHFA) is directing Fannie Mae and Freddie Mac to do the same with all mortgages backed by either enterprise.

In addition, Freddie Mac and Fannie Mae will also be presenting forbearance options to borrowers affected by the pandemic, and financial institutions and lenders are offering similar options, too. This would allow borrowers to have their monthly mortgage bill suspended for up to 12 months due to economic hardship caused by the coronavirus outbreak.

If you have a mortgage and are worried about being laid off or having your income drastically reduced, be proactive and contact your lender or mortgage servicing company. Chances are there are remedies to help you through this year.

Don’t Repeat the Mistakes of the Past

When I asked J. Scott, the author of Recession-Proof Real Estate Investing, his advice for investors who haven’t weathered market downturns, he had—unsurprisingly—a lot to say.

“I remember a couple occasions in college stumbling back to my apartment after a few too many drinks, the room spinning, lying on the edge of my bed and thinking to myself, ‘I will never do this again,’” he says. “And for a few days, maybe even a few weeks, that memory was enough to keep me from doing it again.”

But the memory of the misery didn’t last. “The pain, sickness, and nausea was no longer fresh in my mind, and I was free to be the same stupid kid, making the same exact mistake,” he says.

What does this have to do with real estate investing? A lot, actually.

graphics for REI during a downturn guide 02

In the early-aughts, before the effects of the 2008 “Great Recession” started to fade, Scott spoke with a number of shell-shocked investors. All of them faced financial and investing struggles—“but we made it through, each of us with a new-found perspective on what a massive economic shift could do to our industry and with a healthy fear of it happening again,” he says. “At the time, it was hard to imagine the good times ever returning.”

Things did get better. We’re here, a decade later—and like those hazy college nights, the memory of 2008 has faded away. “I still have the memories of feeling scared, confused, and overwhelmed, and feeling things would never return to normal,” Scott says. “But I just can’t put myself back in that place to really feel it. It’s more like a dream than a memory.”

He’s not the only investor that feels that way. Many have been operating like 2008 never happened, and have lost their perspective on how bad things can be. In this current crisis, Scott says he sees a lot of investors who are suddenly snapped back to reality, once again catching a glimpse of the potential bad times that real estate can bring.

Except we’re not college students anymore. As real estate investors, we have the gift of hindsight—and we can’t hesitate to use it to keep our risk tolerance in check.

“As investors, we must always remember that things are never as good or as bad as they seem,” Scott says. During the bad times, “we have to remind ourselves that the economy, the markets, and real estate itself is cyclical. It will get better. Things will return to normal, and we must make good investing decisions that will prepare us for when that shift back to ‘normal’ occurs.”

Hindsight is important in good times, too. “When it seems like the party isn’t going to stop, when it seems like real estate prices will never stop going up, we need to remind ourselves that every bull market has an expiration date,” Scott says. “As difficult as it can be to remember what it felt like last time, we must try to put ourselves back in those shoes so that we can adequately prepare ourselves for an unavoidable period of angst and uncertainty.”

The Best Recession Investing Strategy

Ready to prepare yourself for a successful financial future? Sign up for a BiggerPockets membership and download the full guide to investing in real estate during an economic downturn, featuring more insights from Mindy Jensen and J. Scott—and an exclusive excerpt from J. Scott’s Recession-Proof Real Estate Investing.

Here’s what else you’ll find in the full guide:

  • What to expect from the housing market throughout the rest of 2020 and comparisons between this downturn and the 2008 housing bubble.
  • How to protect your investments during a significant decline—including risk factors, ideal asset allocations, and opportunities specific to 2020.
  • Guidance for assessing today’s unique economy, including how to interpret the current commercial market, choosing asset classes, and understanding the broad factors affecting supply and demand.
  • Smart recession investment strategies that will position you for success once economic growth returns.

Already signed in? Download the full Recession Prep 101: Investing in Real Estate During a Financial Crisis guide now. New to BiggerPockets? Sign up today to read the full guide.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.