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Best hedge against a recession!

March 17,2020 | Posted By Flavia Brown in Real Estate
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Income properties (multi-family) are the best hedge against a recession.
In addition to homebuyers being attracted by low interest rates, California’s severe housing shortage, which will continue for years, will cause a continual seller’s market (greater demand than supply, prices increasing, etc.). Property values are expected to drop a bit (up to 10%) during the next few months only if there will be a recession, but prices always go back up. Recently, as a Realtor I have encouraged buyers to consider income properties, like duplexes, triplexes, and quadruplexes. The more units the better, but even condos, townhouses, and SFRs are desirable income properties and hedges against a recession.Because of the high demand for rentals, investing in those properties is the best way to counteract a recession. Live in one unit and have renters pay your mortgage, property taxes, and homeowners insurance. Landlords will rule for a long time. As of March 2020, it is estimated that California is 3-4 million homes behind demand. Following are a few excerpts from internet articles:
The 2008 housing market collapse was a nightmare for homeowners, but it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties. If you can rent out the property to a reliable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values start to rise again, you can sell at a profit.
  • The most obvious way to become a real estate investor is to buy an investment property (or several). When I use the term "investment property" I’m referring to a residential or commercial property that you plan to rent out to tenants -- not a fix-and-flip.
  • Owning rental properties is an excellent way to invest in real estate while building wealth and generating income. The return potential is strong thanks to a combination of income, equity appreciation, and the easy use of leverage when buying real estate. However, owning rental properties isn’t right for everyone, so consider these drawbacks before you start looking:
Cost barriers: It can be very expensive to buy your first rental property. Most lenders want at least 25% down for an investment property loan and it’s smart to keep several months’ worth of expenses in reserves.
Uncertainty: When it comes to rental properties, vacancies happen and things break. While the overall return potential can be great, rental properties have considerable short-term risk.
Time commitment: Even if you hire a property management company, owning a rental can be a time-consuming form of real estate investing.
  • House hacking is essentially a hybrid of buying a home to use as a primary residence and buying a rental property. In general, the term refers to buying a residential property with two to four units and living in one of the units while renting the others out. But it can apply to buying a single-family home and renting one or more of the rooms. Let’s say you find a quadruplex (four units) for $200,000. Including taxes and insurance, we'll say your mortgage payment is $1,500 per month. After you buy the property, you rent out three of the units for $600 each and live in the fourth. Not only do you live for free (the rent covers your entire mortgage payment), but you’re generating positive cash flow of $300 per month and are building equity in a more valuable property than if you had bought one unit to live in. House hacking can be an excellent low-cost way to start building a portfolio of rental properties. Because you live in the property, even a multi-unit residential property can qualify for primary residence financing, which comes with lower interest rates and lower down payment requirements than investment property loans. You’re typically required to live in the property for a certain amount of time after you buy it, but once that period expires (usually a year or two), you’re free to repeat the process with another multi-unit property. The obvious downside is privacy. There’s value in having your own yard, and it can create some awkward situations when you live in the same building as your tenants. Even so, if you’re a new real estate investor and don’t really need your own house, you may want to consider house hacking. My first real estate investment was a house hack where my wife and I bought a duplex and rented out one of the units.

Your questions or concerns are always welcome.

Flavia Brown
Realtor®
BRE #01729313
An astute dealmaker
Realty One Group United
Torrance and Hermosa Beach, CA
homesbyflavia@gmail.com
homesbyflavia.com
310-961-1300 (cell/text)
310-702-6335 (assistant -- cell/text)


 

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