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Last updated: October 28, 2022 • Real Estate Investing

How Do You Invest Smartly During the Recession?

Is America experiencing a recession yet again (the latest ones being 1981-1982 and 2008)? Are we one step closer to the end of days? Join us as we explore the secret mechanisms behind the present financial crisis and try to prove that there is still light at the end of the tunnel. 

Because no matter how dark these times get, you can always protect yourself and your family against economic uncertainty. Moreover, you can still invest during a recession and make decent money.

Article Summary:

Real estate in the forefront

business woman on ladder looking far

Is buying a property, selling it, or investing in it the most viable solution for you? As you’d expect, we will approach this sensitive topic from a real estate point of view and find an answer to how to protect against a recession smartly. 

To get the most accurate response to that inquiry, we wholeheartedly recommend you contact established and skilled local real estate agents in your area! They can nudge you in the right direction based on regional and neighborhood market trends and comps. Besides, we advise you to review our real estate market predictions for 2022!

US real estate and the recession

recessions fears symbol concept words

Are you living in one of the most vulnerable US cities to recession? Or are you the lucky one owning or renting a home in a so-called recession-proof city? Undoubtedly, a severe blow to all sorts of business activities will have its toll on every region in the United States. Still, the question is, to what extent? 

Is real estate still the most reliable answer to the questions “how to invest before a recession?” and “how to make money in a recession?” Or are we due for a real estate recession as well?

We can expect fewer homebuyers with lesser income to throw away. Most likely, the housing demand will fall, home prices will decrease, and real estate revenue will stall till the recession ends.

What is a recession, and “what is it good for?”

thinking man bubble on blackboard

Let’s consult the textbook definition of recession, which states that a financial ‘fallout’ equals extreme hard times, a collapse, or a considerable decline in economic growth. You’d better prepare for the worst-case scenario because analysts agree it can last months or even years. 

Generally, any country facing a recession won’t produce its typical amount of economic output or GDP. Additionally, businesses must cut their expenses, resulting in people losing their jobs. In short, unemployment ‘thrives,’ retail sales go down, and manufacturers create fewer goods. 

Are there signs foreshadowing a recession?

Since there have been so many economic recessions throughout our existence on Earth, you must wonder why we can’t predict them in time. Analysts agree that a low unemployment rate is the first notable indicator, yet not exclusive and determining, that something terrible lurks in the dark. 

In addition, interest rates on long-term bonds and loan contracts depreciate below short-term bond rates. This is what we call the inverted yield curve

In other words, investors accept lower rates for safety. This phenomenon also affects a reduced consumer sentiment and confidence in investing in stocks. Your investment opportunities are limited in a recession. 

How to invest before a recession?

road sign words commodities stocks

Let’s see some safe bets with which you can prepare for the approaching economic storm. Bonds and market CDs (certificates of deposit) are two options for maintaining your money in stock assets, stocks, or funds. Some investors invest in untraditional ways they know will pay off in the next five to ten years when the recession ends, as the economy begins to recover. 

Should you keep your money in bonds, digital stock, or real estate?

These unconventional investments are peer-to-peer lending and, in fact, most blockchain technology-based enterprises, particularly those in the fintech (financial technology) industry. One fintech business that has piqued the interest of professional investors claims to have created a new type of digital stock, which they call a New Asset Class (NAC.)

How about property investments? Suppose you consider buying or selling real estate as a form of investment before a recession. In that case, it would be best to ensure that you have wiggle room in your budget to afford to spend the money. 

You must anticipate an eventual need to sell during a recession, which most certainly implies that you’re going to lose a considerable amount due to unpredictable market fluctuations. Because no matter what, the housing market will rise from its ashes. Prices will gradually increase again. The question is, how long can you hold on to your property before selling it?

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What is the current situation of the American recession?

usa flag wooden inflation concept

Are the indicators mentioned above present in our economy? Yes, they are. You can find a low unemployment rate (the Wall Street Journal reported that it went down below four percent in 2022) and an unwillingness to invest in the stock market. At the same time, the GDP decreased at a 1.4 percent annualized rate in the first quarter of 2022.

Many doubt the Federal Bureau’s neighborhood rebirth plans and their efficiency designed to address our concerns and protect the population against recession. High property prices certainly won’t put our fears of recession to rest. Moreover, they can trigger inflation while the scarcity of new constructions will just enforce the recess affecting the US real estate market. Investing during a recession became a tough nut to crack …

Hollywood often presented Wall Street in a financially romantic fashion. Yet, nothing is charming about the Stock Exchange reporting that the US stock market has lost about seven trillion dollars since the start of 2022. Financial securities on Nasdaq, for instance, went down 28 percent, an uncontestable sign of impending doom. The Federal Reserve also seems to confirm this theory. 

Here’s the vicious cycle we’re about to experience in the upcoming period. Soon, the economy will find itself on a cliff’s edge with rising inflation. US businesses will lay off employees, who will spend less money; thus, enterprises will be cut off from profit.

How to make money in a recession?

Let’s analyze intelligent ways to invest during a recession, shall we?

Cash kept under your pillow will depreciate.

happy shoutting arrogant boy

Most financial advisors, analysts, and investors agree that keeping your money in cash is terrible. Cash won’t make more money during a recession. During inflation, cash held in a savings account at a bank or under your pillow at home will become less valuable during an inflationary period. 

Also, we recommend calculating the real return on your investment during a recession. Take the initial income and subtract the percent of the current inflation. So, holding on to cash has a real return that equals zero. Obviously, cash is not what we are looking for when figuring out how to make money in a recession.

Should you purchase bonds?

As we mentioned, fixed interest rate bonds represent a better alternative to cash. Albeit, when you consider the factor of inflation, they’re not as safe as the great public may think. The current yield on a ten-year US government bond is 1.8 percent on your investment, which goes into the negative realm once substantial inflation sets in. 

In other words, purchasing government bonds should figure high on your list of how to make money during a recession.

Securing a mortgage before a recession

businessman holding business card

The title refers to a more sophisticated method to invest simultaneously before and during a recession. Yet, securing a good loan presupposes you somewhat expect the coming events. People borrowing money in a long-term structure at a fixed rate can be called genuine recession winners, for instance, those who use a mortgage to buy real estate. That is before the foreseeable inflation. 

Securing a 25-year fixed rate loan at three percent implies that the interest rate and mortgage payment won’t change during the said period. Alternatively, this is how to make money during a recession because inflation diminishes the value of the mortgage debt. Lenders can repay their mortgage debt with depreciated dollars. Therefore, inflation can wipe out your mortgage. 

What are unproductive assets?

aerial view farmlands

You know them by the name of silver, gold, and various other precious metals. Since every item’s price rises with inflation, unproductive assets keep up with the recession. So, it’s a good idea to bet on keeping your money in silver and gold. Though, they won’t boost your purchasing power.

Let’s see Warren Buffett’s opinion on how to make money in a recession!. The famous American business magnate declared that he preferred owning farmlands to the identical amount of unproductive assets anytime. Because the latter would generate revenue while the assets’ sole power was to shine pretty.

Sink your teeth into productive assets!

woman holding virtual global

Experienced investors don’t simply intend to keep up with the recession but strive for their investments to outperform inflation. This is how they generate a real return- how to make money in a recession. Average businesses need ample additional capital to maintain their existence. 

Small and medium-sized enterprises (SMEs) must invest more money into their business to survive inflation. These are businesses with high capital requirements. Investing in their bonds might be a risky business.

Suppose you wish to invest in a business and know how to make money in a recession. In that case, we recommend finding one with low capital requirements. Most typically, these are enterprises with established brands and technology-focus corporations (Pepsi, Apple, Facebook, Microsoft, etc.) They don’t need to endlessly re-invest substantial money from their income back into their businesses just to keep afloat.

During an economic crisis, you invest during a recession smartly by holding stocks in companies with high pricing power. As their product prices also inflate, their customers will still buy their merchandise, no questions asked. 

Rental properties are a jackpot!

rental income image concept

Even during a recession and inflation, people will always need a place to stay. They need a home to live in peace with their family. Or they need a vacation cabin for their short-term stay during their holiday.

One of the fundamental ways of how to make money in a recession is getting into the rental game. Put simply, you buy an apartment or house and publish an ad in which you seek a tenant. The same rule applies to Airbnbs as an alternative to traditional renting. Note, though, that both needs a couple of often overlooked things. One is a tenant screening process, and the second is sprucing up the place. Also, as a landlord, you might want to look into tax deductions for rental property owners, such as tax breaks (deductions) on home office costs or Solar roof panels.

How not to invest smartly in real estate during a recession?

graduates on top money image concept

As a (questionable) rule, people believe that real estate is the most accurate answer to the question of how to invest before a recession. However, this can backfire on them if done poorly and without a plan.

They buy up properties and farms to fend off a possible recession. Thus, they artificially generate higher property prices. 

You’ll know the event has happened once you encounter multiple offers on a house way above its price. Soon, the house becomes an overpriced asset that doesn’t produce any additional value. Precisely the same chain of events happened in 2005 and 2006. If we aren’t precautious, we tend to repeat that. 

And finally, you can forget about house-flipping as a way to make money in a recession. It is most unlikely you will be able to make more money after selling a house than the price you originally bought it at.

Conclusion

The prospect of a recession is frightening because no one really knows how it will affect us and how long it will last. Some investments can bring you a piece of mind during these stressful times. This article intends to guide you on investing smartly during a recession. You must consider the concept of real return every time you decide to contribute money to a business, buy stock, or real estate. Know that some investments won’t bring you a profit instantly, but they’re still worth hanging on to them. 

Which is the most effective way to make money in a recession? Being a teacher, lawyer, military staff, construction worker, etc., are some of the best examples of recession-proof jobs in the US. Education is the key to success and unquestionably the top investment. Relying on your own talents, professional experience, and wisdom is the foolproof way to protect against a recession because people will always need your input.

How would you invest during a recession? Would you go with one of our picks or come up with something new? Share your opinion with us in the comment section below. Did you like our article? If you do, please like, and share it with your friends on your social media!

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