By Charles Sells
Whether you are investing in real estate to generate accelerated cash flow or hoping to create long-term wealth through equity and appreciation, you probably are aware that one of the best aspects of real estate is that it is “never worth zero.” Fans of this asset class have been repeating this mantra since the first investor inked their name on the first deed and filed it at the first courthouse. Mark Twain immortalized the sentiment when he wrote, “Buy land; they’re not making it anymore.”
Every real estate investor knows that real estate is, by and large, one of the most reliable, accessible, and relatively accelerated ways to generate wealth and returns in the modern world.
Of course, that is not to say that your real estate investments are guaranteed to always make money. Real estate investments, like all investments, have some degree of risk. One of the best ways to minimize that risk, however, is to identify types of real estate investment that are “recession-resistant” and, as of 2020, “pandemic-resistant” as well. The first step is to identify what it means to say an asset is “resistant” to some type of event, such as a recession or a pandemic.
3 Hallmarks of Resistance
- Resistance does not equal immunity. Merriam-Webster’s Dictionary defines the word “resistant” as “not affected or harmed by something” and “capable of exhibiting resistance.” Investors must note, however, that being resistant to something is not the same as being immune to something. Just as water-resistant watches are not affected by water until they reach a certain depth, recession-resistant and pandemic-resistant assets are not necessarily negatively affected by these negative events but they can be if the pressure becomes too intense.
Lesson Learned: An asset that is resistant to a recession or a pandemic is less likely to be negatively affected by these events than other assets, but it is not immune to them.
- Recession-resistance is not limited to alcohol and funerals.
The term “recession-resistant” has been commonly used in investor conversation for more than two decades at this point, and it has been part of the broader investing conversation for more than 100 years. Typically, recession-resistant stocks, for example, will not be “greatly affected” by a recession, writes Jason Fernando, an Investopedia contributor. Historically, industries considered recession-resistant included alcoholic beverage manufacturers, discount retailers, and funeral services. In real estate, self-storage has long been considered a prime recession-resistant investment. Rental properties may also fit this standard since homeownership tends to fall during recessions.
Lesson Learned: Assets that are still in demand and for which consumers will sacrifice other goods and services in their budgets so they can retain the ability to require said assets are resistant to recessions. This does not mean that returns do not fall at all, but it does mean they are less likely to fall and, in some cases, demand for this type of asset may rise. For example, self-storage tends to be in greater demand during a recession because homeowners may downsize and need somewhere to store the possessions that no longer fit in their homes.
- Pandemic resistance will involve changing behaviors and consumer demand.
Now that we have established what the older term recession-resistant implies for real estate investors, it is time to add in the pandemic factor. For the purposes of this article, we will use pandemic to refer specifically to medical phenomena such as those elicited by the novel coronavirus COVID-19, for which there is presently no vaccine or cure and which appears to be highly contagious, necessitating massive lifestyle changes on the part of the general public.The coronavirus pandemic has certainly created the current recession, so for an asset to be both recession-resistant and pandemic-resistant, it needs to be somehow supported by a “new normal” in which physical distancing and limited social gatherings are daily issues. This means that a real estate asset that places people in close proximity, such as an indoor amusement park or a movie theater, is likely to be highly susceptible to pandemic conditions. Similarly, retail shopping space and office space are likely to suffer when consumers work from home and do not go out to make nonessential purchases.
Lesson Learned: An asset that is pandemic-resistant and recession-resistant must be fully functional and possibly even more attractive during a pandemic than it was before. This will inherently render it recession-resistant in most cases as well.
Why Single-Family Residential Real Estate May Be the Only Pandemic-Resistant Type of Real Estate
In an unprecedented time during which people require more in-home entertainment than ever, need easy access to private outdoor areas, and are likely to be working as well as playing at home and inside their homes, the single-family residential asset class – both rentals and homes sold at retail and occupied by the buyer – shines like a lone star. Single-family residential properties have numerous advantages over other types of property classes at present, including:
- More assistance programs for owner-occupants who cannot afford their mortgage payments, making the option to buy look more attractive than renting.
- More living space and more recreational space that is not shared with other families or community members as well as an independent ventilation system that does not recycle air throughout a larger community building.
- The option to continue to accumulate wealth through building equity as homeowners may continue to increase their net worth by paying their mortgage even if they are not currently in a position to earn increasingly large salaries.
- A relatively stable “price floor” that is keeping home sales prices solid in most areas of the country due to the rising demand for single-family residences to either rent or own.
- Diminishing value of school districting as more public and private institutions explore the idea of extended remote schooling and more parents opt to go online in order to protect the family from contagion and a “second wave” in the fall.
- The best ability to shelter-in-place and isolate if necessary because there are fewer shared living spaces and greater access to entry and exit routes.
It soon becomes plain that the only option for accessing these advantages to make life easier and more amenable during a stay-at-home mandate and to protect a family from still-unknown variables affecting viral contagion is to live in a single-family residence. For this reason, an increasing number of real estate investors are choosing to focus their 2020 acquisition strategies on single-family rentals and fix-and-flip deals.
While there are other asset classes that could be arguably recession-resistant or pandemic-resistant, it may be that no other real estate class meets the criteria for both. That is why the demand for single-family residential properties is growing and prices are rising even in the midst of this crisis. Real estate investors who choose to acquire these properties to rent or fix and sell at retail will be adding to an inventory of highly desirable properties that are likely to retain their value and appeal even in the event of an extended downturn or ongoing issues in treating the coronavirus and containing the spread.
Charles Sells is founder and owner of The PIP Group, a push-button, turnkey service provider helping clients invest passively in everything from tax liens to fix-and-flips. Charles and his team at The PIP Group have taken the stress out of investing in distressed real estate, by enabling investors to have their individual investments remain in their name and their control, retaining 100% ownership, with Charles and The PIP Group team at the helm to make certain those investments remain profitable. For more information, visit PIPGroup.com.