Buying an Austin Investment Property During the 2023-24 Recession
Will Austin real estate be a good investment in the 2023 recession? Here’s some things to consider.
When a recession takes hold, it’s a good time to do evaluate your portfolio and acquiring some real estate investments can help balance stock holdings. Rental properties can act as a natural hedge against market volatility, but is real estate a good investment in a recession? It certainly is if you take the right approach. If you manage to buy at the bottom of the market, the only way to go is up.
Real estate is more stable than many other investments when the economy slows down. Demand for rental properties often goes up during a recession because if homeownership is down, people still have to live somewhere. Assuming tenants are able to keep up with their financial obligations, a rental property could provide a steady stream of passive income even when the stock market is down.
Recessions can also make getting into the landlord business easier if property values drop. If you’re looking to purchase a new investment property, a recession means you can get a property at a discounted price. That’s a plus if you have limited capital to invest in a rental property or if you’re interested in purchasing more than one property to create multiple income streams. It’s nearly impossible to time exactly when the market will hit the bottom or the top, but even if you’re making deals on the way down, there is money to be made.
As with any other investment, it’s important to have a plan when acquiring rental properties into your portfolio and even more so during a recession. There are some unwritten rules to follow to help ensure that your rental property investment pays off.
- It’s still mostly about location, location, location.
- Consider cash flow.
- Follow the rules when using IRA funds to invest.
- Research deals thoroughly.
Location, Location, Location
In evaluating rental property investments for a recession, always get the full lay of the land. When purchasing an investment property, whether in a recession or not, the key rule is ‘don’t buy the house, buy the location’. Specifically, that means scouting out areas that have stable employment bases and a positive job growth outlook. Job scarcity can throw a wrench in your rental income plans, so it’s important to test the economic waters before you buy. If your tenants are out of work, they can’t pay rent and may move to areas where jobs are available. Is Austin one of those places that has a stable employment base and a positive job growth outlook? Compared to much of the rest of the United States, we think it does.
Lifestyle is another factor to consider when choosing a location. Areas that are walkable or close to parks or shopping are more desirable for renters. Even without a recession, investment properties in those areas are often more profitable.
Consider Cash Flow
Estimating cash flow is another important rule for how to invest in rental property during a recession. If you want to add a rental property to your portfolio in a market downturn look for properties that are still cash-flowing. That means, properties that still have cash coming in after taking out expenses like insurance, maintenance and the mortgage payment. Cash flow rental properties can help to minimize risk during a recessionary environment. Cash flowing properties can be attractive, but when buying a rental investment, don’t overlook the need for keeping a liquid cash reserve available to help cover expenses. In a recession more than other times, there may be more of a delay between acquiring the property and getting it to positive cash flow.
Rules For Investing With IRA Funds
Getting a loan is one option for funding a rental property purchase, but during a recession, lenders tend to tighten the purse strings, making it harder to borrow. In that scenario, using a self-directed individual retirement account or 401K to purchase an investment property can make sense and offer some tax advantages. It’s important to remember that investing in real estate using your IRA retirement funds comes with some strings attached. Here are some guidelines to keep in mind.
The subject property must be an allowable investment. That includes vacant lots, raw land, single-family or multi-unit homes, apartments, townhomes, condos and foreclosures. Mobile homes and timeshares, on the other hand, are generally excluded. There are also regulations regarding the property’s use. For example, the IRS rules do not allow you to live in or use a property owned by your IRA.
Also, any improvements or repairs to the property can’t be made by you or by a company that is owned by you or another disqualified person. In other words, if you run a painting business, you’d have to outsource painting your rental property to someone else. Otherwise, you’d forfeit any tax benefits associated with owning real estate within your IRA or 401k.
Things like maintenance, repairs, property taxes and even the earnest money deposit used when buying the property must come from the IRA to avoid triggering tax consequences. For that reason, it’s important to make sure you’ve planned ahead properly if you’re considering using a self-directed IRA to buy a rental investment. The best way to prepare for any property-related expenses is to ensure your IRA has sufficient funds to cover them.
Research Deals Thoroughly
A good rule of thumb for buying a rental property during a recession or at any time is that if something seems too good to be true, it probably is. In a recession, there will likely be a number of owners trying to unload properties that they can no longer maintain or afford. This situation creates those buying opportunities but don’t skip the due diligence. Real estate investors should always be on the lookout for red flags, such as a lack of rental income, poor location, tax or other liens and an obvious lack of maintenance or upkeep. Getting a detailed inspection, checking court records for liens and researching rental trends for the area can help you gauge an investment property’s short- and long-term potential. If you come across what looks like a great deal, don’t forget to ask yourself why the property is for sale to begin with, and don’t buy someone else’s problem child.