Get Rich in Real Estate: How to Turn the Economic Downturn to Your Advantage

Published: 03-16-23    Category: Investing

MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.

green chutes emerging from stacks of coins

Younger investors are currently experiencing their first sustained downturn in financial markets, and some are seeking ways to increase their holdings and emerge from the economic downturn stronger as a result. Notwithstanding the difficulties the real estate sector is currently suffering, there are still chances for astute investors to make money from the market. In this post, we`ll look at two crucial sectors of the real estate market with room for expansion: office and housing REITs, as they represent a sort of quality spectrum of CRE assets.

Residential REITs for Housing Market Exposure

Despite the economic uncertainties brought on by the pandemic, housing starts and permits increased markedly in February, according to the US Census Bureau. This suggests that the housing market is still robust and that investors may benefit from this development. The rental industry in particular is still expanding significantly. There is a rising demand for rental properties as a result of people`s reluctance or inability to purchase homes in light of the current economic climate. By making investments in real estate investment trusts (REITs) that focus on rental properties, you can benefit from this trend as a young investor. Investors can do this to easily get exposure to the rental market without having to deal with managing and owning individual properties.

It`s important to remember, though, that not all rental properties are created equal. There can be too many rental homes in some locations, which could enhance competition and drive down rents, and there could be too few in other locations. Residential REITs offer investors a way to participate in the equity growth of residential property without having to conduct due diligence on individual properties, qualify for a mortgage or save a specific percentage for a down payment. And they must, by law, distribute at least 90% of their net operating income to shareholders, which means management and other expenses are capped at 10% of that figure.

Office REIT Downtown City Center Exposure

Office REITs are another sector of the real estate market with significant potential. According to Bisnow, the pandemic and other economic stimulii have put office REITs in a financial bind. On the other hand, this offers investors the chance to get office REITs for less money, and therefore a greater return, all else being equal. The need for office space is currently seeking equilibrium in the wake of the remote revolution, but as the economy strengthens and businesses innovate as well as resume more normal operations, the value of office REITs could increase as a result, giving investors a healthy return on their investment. Since profitable office properties tend to cluster in city centers, office REITs offer this geographic exposure.

It is very important to remember that the growing movement toward remote work is posing serious difficulties for the office industry. The need for office space has grossly decreased as more businesses permit employees to work from home; however, backlashes have been brewing. The question is what is the optimal number of office properties in what locations, and how flexible does that figure need to be; and the long-term answer to this question might not be evident for some time. Also, it`s possible that some businesses are reducing the size of their actual offices in favor of remote employment. Examine the market trends and the financial standing of the buildings in the office REIT`s portfolio before making an investment decision.

The Big Discount - Why Watching This Could Be Profitable

As short-term interest rates have risen from 0.25% to 4.75% in the last year, regional banks in particular have not managed their fixed-income portfolios, of which CRE loans are a part, very well, generally speaking. While most news has tended to focus on banks` bond portfolio losses, many CRE loans are also held on the books of regional banks at prices reflective of a bygone era. These portfolios, and the properties that underlie them, will very likely have to be marked down in time, as they are simply not worth as much as they once were in terms of exchange. When and if this occurs could present a lucrative opportunity for young investors to advance their investment goals by purchasing affected REITs as their asset values better reflect the actual value of the properties in the current environment.

Optimizing Return Relative To Risk

To reduce risk while investing in real estate, it`s crucial to diversify your holdings. This entails making investments in a targeted range of assets, such as equity investments, fixed income, and specialty vehicles such as REITs or limited partnerships designed to work with an investor`s other holdings to achieve certain specific risk profiles or optimize returns to them. To further diversify your portfolio, consider exposure to real estate in other geographic areas.

Conducting Proper Due Diligence Is Not Optional For Success

Before making any investment decisions, it`s also imperative to conduct proper due diligence and study. Spend some time researching market trends, looking at potential investments` financial statements, and, if necessary, speaking with a financial counselor. Making educated selections is crucial because real estate investments may be complicated as well as expensive, so risk should only be taken expressly.

All Together

In sum, the current economic slowdown offers young investors the chance to increase their investment assets as the economy consolidates. Investors can benefit from the rising demand for rental properties and the potential for post-pandemic growth in the office industry by concentrating on rental properties and office REITs. These offer exposure to certain benefits of property ownership without having to save a large down payment or qualify for a mortgage. To reduce risk, it`s paramount that any investor properly diversify her portfolio, pay close attention to market developments, and assess the viability of new investments carefully. Young investors can use economic weakness to emerge stronger and in a better financial position with careful planning and a smart approach.

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