Aviva is the managing broker of The Warehouse Hotline and a broker, owner, and investor in Denver, Colorado.
When a recession is looming, stock investors are taught that short-term pain should be ignored in favor of focusing on long-term gains. The same concept is true for commercial real estate investing. Short-term market disruptions shouldn’t overwhelm you when you own profitable properties with reserves and have a good loan-to-value ratio. That said, it helps to create a portfolio that offers you peace of mind when the market is headed in the wrong direction.
Four Commercial Properties To Include In Your Recession-Era Portfolio
While it’s impossible to fully protect your investments from the effects of a recession, a useful strategy is diversifying your portfolio properly. Here are four types of commercial properties that can help with this.
If you’re looking for a real estate investment, consider farmland properties. As prices continue to rise and consumers buy less, one thing they won’t stop buying is food. If you own land where soybeans, wheat or corn is farmed, for example, your cash flow can actually rise with inflation because the value of the land increases alongside it.
The key to these investments is finding a competent partner to help farm the land. After all, the last thing you want is for the harvest season to arrive only to discover your crops are dead. Many investors opt for farmland real estate investment trusts (REITs) or commercial investment trusts. This allows someone else to handle the maintenance aspect while you get a large dividend annually.
2. Warehouses With Office Space
The exponential growth experienced by the e-commerce market has fueled industrial real estate growth over recent years. Warehouse space is more popular than ever before, and when the property also includes office space, it provides that much more flexibility.
With these spaces, you have multiple revenue options. You can find one tenant to lease the entire property or one tenant for the warehouse and another for the office space. If you can’t find tenants, the warehouse can be turned into self-storage spaces, and the offices can be a write-off expense for your own business.
3. Real Estate Investment Trusts
Some investors rest easiest when they know they’re earning passive income with a hands-off approach. If this sounds like something you’d enjoy, consider adding real estate investment trusts to your portfolio. They’re one way to add diversification to your portfolio, and investment diversity can help you survive a recessionary period by reducing your chances of being negatively impacted by market volatility.
Consider investing in a REIT related to property types that interest you. For example, rather than acquiring farmland, invest in a farmland REIT; instead of buying a warehouse with office space, buy into an industrial REIT. There are even REITs for subsectors that many investors would have difficulties investing in alone, such as timberland and infrastructure.
4. Existing Properties
If you already own properties, building equity is one of the best options for getting a return on investment. This is especially true if you’ve had the property for more than five years. While making improvements could provide a nice influx of cash when selling your property, it may also provide excellent cash-on-cash returns.
The real estate market is in a sort of stalemate. Currently, mortgage originations are down and rates are up, but prices haven’t started trending downward yet. With low housing inventory and high demand, you have two real options. You continue to collect and save cash from your investment until rates stabilize and lower, or you can sell now and buy something new while the market is still at its peak.
Keep in mind that as long as your loan-to-value is good, short-term price declines won’t matter. So to optimize your existing portfolio, consider adding amenities wherever you can. For instance, if your properties have older appliances, invest in newer models. Anything that will help your property be more attractive to boost rental income when the market slows is great.
At the end of the day, the best way to protect yourself during an economic downturn or a recession is to diversify your portfolio. Some investors find it easier to buy the physical property and partner with people to run it, while others prefer a more hands-off approach. Regardless of which path you choose, having at least a portion of your investments in commercial real estate can help you through a recession.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.