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In today’s market, yes, another recession is always looming, even in the midst of a bull market or in the midst of a recovery from a recession. We simply don’t know when the recession will start until you are right in the midst of one. Even in recession, you simply don’t know when it will start to recover and it’s impossible for anyone to tell you this.
Let’s suppose if you buy now and recession comes and bottoms out in 5 years. Then you would have made enough investment returns and equity gains to off-set any recessions’s effects. For example, rental properties in good neighbourhoods in Edmonton appreciate 3-6% a year on average. If you get 5 years of such appreciation and the market drops by 20%, you would still be profitable as you would have had some positive cash flow and mortgage principal paydown. As for the stock market, you would really need to time the market to be profitable as there is no mortgage principal paydown and some stocks do not pay out dividends.
As you have seen during the Great Depression in 2008-2009, in Alberta rents do hold up quite well in recession especially for detached houses in good neighbourhoods. Many homeowners could not afford their mortgage anymore so they had to get rid of their property and become a tenant in one of your properties. So by being a responsible landlord, you are providing these tenants with quality housing options in good neighbourhoods while they are recovering from the loss of their home and paying off any debt they may have.
In order to get into a good cash flowing rental property, you need to have plenty of cash with you to get started. Usually the banks do not want to finance you the mortgage unless you have 20% of the purchase price as down payment and this 20% usually has to be cash or is coming from a secured loan. With the tightening of the lending market in the last few years, banks are becoming extra cautious in giving out mortgages so this reduces the buyer pool and lowers the property price further.
You may be still thinking about how you can time things perfectly and get a deep discounted property. This however comes with an expensive trade-off. While you wait for the recession bottom and a deep discount property, you will have to be sitting on low yield cash for indefinite years. During these years you are foregoing 5-10% profit while this money sits on your hands. You can’t invest in other markets as stocks as their prices will be falling just as you need to cash out.
Ultimately, you will have to decide for yourself when you want to get into investment property. Long-term, well-managed rental property in a good location will deliver significant return to help you build a recession proof investment nest egg.
Why buy now
First, while a recession is inevitable, you will never know when it will start. Nor do we know if it will be short and mild or if it’ll be severe.
Second, rents are a lot more recession-resistant than are real estate prices. People need a place to live all year long and in recession more people end up renting compared to pre-recession. Also, your payments don’t change if you have a fixed-rate mortgage. Even if you have a variable interest rate, in recession interest rates tend to go down.
Lastly, even if your property value goes down, this loss is not realized until you actually sell it. Until then, it’s only a number on the paper. You just need to be patient for the economy to return around to sell for profit.
Getting into the right property is more important than timing
You’ll start with a positive cash flow property in a good location with stable rents and flat expenses including mortgage so your cash flow will remain positive (you should not buy a property if it does not have positive cash flow)
You may be disappointed that the income property you bought for $450,000 would go down in value to $400,000. However you are still getting your positive cash flow and as long as you don’t sell it out of fear, the market will eventually turn around and go up in value. Until then you can enjoy the cash flow and mortgage principal pay down building equity quietly while you sleep. The people who were lost the most during the recession are the ones who sold at the bottom of the market out of fear. The Irony is that many of them didn’t have to sell.
Again, the only trick is to buy a good investment property in a good location that will cash flow. If you buy in Edmonton’s market today, the property value may drop little more in this recession but it’s likely to recover within a few years. In the meantime, you can enjoy positive cash flow and mortgage pay down by your tenant.
For free investment advice and coaching feel free to reach out to me anytime.
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