Housing as a recession-proof investment? It sure can be but not for the reasons touted in this article from FoxBusiness. Headlines like the one in this article are misleading for two reasons because it implies that all housing is an investment.
Housing is an investment only when it is purchased with the intention of generating a return. That can be short-term investment returns; like building a new Spec Home, renovating sub-par homes for the purpose of resale or large-scale development of residential subdivisions. Or it can be long-term investment returns; such as rental income.
What makes a real estate investment recession-proof
Your primary residence is not an investment any more than your family SUV is a bus company. If prices go up on real estate in your area you’re not going to sell your house to take a profit. Your private residence is a place to live and as such it should ideally satisfy all the functional, aesthetic and lifestyle needs of you and your family. It is living expense not an investment.
When “Housing” is purchased as a true investment it can be recession-proof if you have three key factors in place for the property. You need to have sufficient equity, a fixed-rate mortgage and adequate cash flow from leases to safely ride-out an economic slowdown. When you have that you have all three you have a recession-proof investment.
Recessions are part of the economic cycle, sometimes deep, sometimes shallow, but no two recessions are ever the same except for one fact. In recessions housing prices often take some temporary hit — but rents do not. Even in the “Great Recession” which had housing center-stage you saw real estate prices drop but rents not only remained stable, they even began to increase in many areas. That is what makes housing investments recession-proof.
How to make your primary residence “recession-proof”
Obviously just because your primary residence is a living expense and not an actual investment vehicle doesn’t mean you should ignore your homes’ value. Growing and protecting the equity in your primary residence is a big step toward building your net worth and securing your families’ financial stability.
Some of the same factors critical to making a true real estate investment recession-proof are the same for your primary residence. Having a comfortable equity position and a fixed-rate mortgage are key. Two of the best times to boost your equity position are 1) at the time of purchase and 2) when designing and completing a whole-house renovation.
Another factor is making your home is more attractive to buyers than the “average” homes in your neighborhood. This is a little tricky to do on your own and requires the assistance of a professional who is experienced with Spec Home Development and able to determine the value range of homes in your neighborhood. The key on this is to not over-spend OR under-spend.
Surprisingly many homeowners under-spend and don’t design properly so money they pump into renovating their property fails to generate a return. More importantly failing to properly design a home leads to the property falling into the “average” home category and “average” homes tend to go through more price reductions to sell.
(Note: We cover budgeting in detail in our free eBook “The Real Deal on Home Design & Renovation Costs.” It includes simple cost guidelines you can use to avoid jeopardizing your equity with over-spending or under-spending. If you haven’t already downloaded that you can get the eBook here.)