How to Make Money in Real Estate in Any Economic Environment

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Article Date

Dec 20, 2024

The Impact of Economics on Real Estate Investing

First, let's take a look at the impact of economics on real estate investing.

The situation is far more complicated than simply house prices going up and down. The real estate market is impacted by a variety of factors, including other markets like the stock market, economic forces like employment and wages, and even political dynamics.

But what's important to note is that economic conditions are rarely strictly favorable or strictly unfavorable for real estate investors. Instead, each unique landscape of economic conditions has both strengths and weaknesses for people involved in the real estate game, and even small alterations to your investing strategy can help you take advantage of them.

A comprehensive analysis of economic factors impacting real estate investors is beyond the scope of this guide, so we're going to focus on some of the most important ones to consider:

Available capital. Economic conditions can affect the amount of capital you have to invest in real estate. Imagine for a moment that you have a business to manage, you're thoroughly invested in the stock market, and you have retirement plans to your name. When economic conditions are good, you'll make more money with your business, your investments will perform better, and you'll have access to more capital, which you can then use to purchase more properties. But at the same time, many other people will be in a similar position, so you'll likely face increased competition and higher real estate prices overall. Conversely, when economic conditions are poor, you might make less money and have worse-performing investments, stifling the amount of money you might otherwise be able to put into real estate. Again, there's a counterbalance to this; if everyone is struggling with available capital, there won't be nearly as much competition for real estate, and housing prices may drop.
Interest rates. We also need to look at interest rates as a critical economic variable. The effective federal funds rate is the rate at which the Federal Reserve lends money to member banks, which then take the money and lend it to other banks and consumers. While this process and the relationships therein are somewhat complicated, the bottom line is this: mortgage interest rates go up and down with the target federal funds rate. Often, but not always, the Fed will increase these interest rates to mitigate inflation and decrease interest rates to stimulate economic growth. In good times, the interest rates go up, and in bad times, the interest rates go down. Obviously, available mortgage interest rates have a huge impact on you as a real estate investor, assuming you're going to take out loans for your purchases. If you can score a relatively low interest rate, you can greatly decrease your mortgage expenses and ultimately make your properties more profitable. On the other hand, when interest rates are high, property prices tend to stagnate or even decrease, as people are much less interested in buying homes when interest rates are higher.The equation gets even more complicated from here. Low interest rates often come into play only after difficult economic conditions, and high interest rates emerge in response to economic prosperity. Accordingly, the relationships between interest rates and other economic variables are multifaceted and not entirely predictable. Still, relatively low interest rates often trigger a feeding frenzy among real estate investors, as they can be excellent buying opportunities (because of minimal interest payments on mortgages) and excellent selling opportunities simultaneously (because of artificially increased prices due to higher consumer demand).
Market dynamics. There are also market dynamics to consider, both in the real estate market and in other markets. To simplify things, we'll focus primarily on real estate market dynamics. Locally, real estate markets often fluctuate between buyer’s markets, which favor buyers, and seller’s markets, which favor sellers. Of the three main economic considerations we are covering in this guide, this is perhaps the most straightforward. It is possible to make money as a buyer in a seller’s market, and vice versa, but it's a bit more of an uphill battle. What's important is that you know what type of market you're dealing with, so you can appropriately plan and perhaps consider alternative geographic areas to invest in temporarily. Attempting to time the real estate market is generally not a good idea, since even the best real estate experts can't reliably predict how real estate markets are going to change, but you can take advantage of markets as they exist in the present.

Why You Can Make Money in Any Environment

Why is it that you can make money in any economic environment?

One explanation is that nearly every economic condition has advantages and disadvantages to offer. In an environment with high interest rates, you'll pay more on your mortgage, but you'll also benefit from relatively lower housing prices and mitigated demand. When your stock investments are performing well, you'll have more cash that you can pull out to fund a down payment, but buying demand may be higher as well.

Another explanation is that real estate offers a diversity of potential strategic plays. If interest rates are high, you don't have to take out a mortgage; you could instead buy a house in cash. If the residential real estate market isn't looking good, you can consider dabbling in the commercial real estate market. If conditions are extremely tough for buyers, and you have a portfolio of properties already, it might be a good idea to consider selling one. In other words, you can choose a relevant strategic play for almost any set of economic circumstances.

General Principles for Success in Economic-Agnostic Real Estate Investing

Of course, there's no guarantee you'll be able to perform well, even if economic conditions are in your favor. If you want to be consistently successful in real estate investing, you need to adopt economic-agnostic strategies like the following:

Know what’s going on. Being economically agnostic doesn't mean following the same strategy all the time, regardless of how bad economic conditions are. Instead, it's about readily adapting your strategy to fit whatever economic circumstances are around you. To be successful in this approach, it's imperative that you know what's going on at all times. You need to have at least a moderate understanding of the various economic factors that can impact you as a real estate investor and change market dynamics overall. On top of that, you need to keep up with the news, so you understand how these economic factors are evolving. The better you understand what's happening around you, the better you'll be able to adapt to it.
Be open and flexible. Next, you need to be both open and flexible. If you have a rigid state of mind and a fixed strategy in your head, you probably aren't going to be successful. If you have a static, unchanging plan to acquire one new single family rental property each year, you may not be able to benefit from certain economic circumstances. On the other hand, if you're willing to update your strategy in real time and to make different plays based on the economic factors you actively and routinely measure, you'll be in a much better position to succeed, especially in the long term.
Manage a balanced portfolio. Nearly any investment advisor is going to advise you to maintain a balanced portfolio. The correct portfolio balance is going to vary, depending on your personal risk tolerance, your needs, and your philosophies on investing. However, it's always important to maintain a mix of different assets and update your portfolio balance regularly as your needs and circumstances change. It's a good idea to have investments other than real estate in your portfolio, and it's important to diversify within the real estate market as well; purchasing both residential and commercial properties, holding properties in different areas, and securing multiple units to hedge against the possibility of tenant turnover can all help you stabilize the returns of your portfolio.
Be one step ahead. Attentive real estate investors adjust their approaches based on what’s currently happening, but better real estate investors adjust their approaches based on what’s about to happen; in other words, they “skate where the puck is going.” Now obviously, even the best economists can’t predict the future, and attempting to forecast every relevant economic variable would be a fool’s errand. But it’s still important to read the economic temperature regularly and try to figure out how dynamics might change in the near term. For example, if you can secure a new addition to your portfolio after interest rates drop but before housing prices rise in response to that drop, you may have a critical advantage over your competitors.
Don’t be afraid to swim upstream. Oftentimes, the majority opinion is wrong – or at least, excessively exaggerated. Swimming upstream – or going against the majority – can work out in your benefit. For example, when people are pessimistic about the future of our economy, stock prices drop precipitously – but if you’re optimistic about the future, especially in the long term, this represents a huge buying opportunity. It’s essentially a discount on valuable assets you were thinking of buying anyway. Don’t be afraid to deviate from the norm if it seems like a good move for your portfolio.
Think long term. For the most part, economic fluctuations are merely temporary, and they won’t have much of an impact on your wealth long term. If you consistently build and modify your investment strategy with a focus on the long-term future, you won’t get bogged down by the little price drops and difficult circumstances that might otherwise plague your best efforts. Always optimize for years and decades instead of weeks and months.

Finding a way to be successful even when economic conditions are stacked against you can be extremely challenging, especially if you're new to the world of real estate investing.

However, it becomes much easier when you have expert advisors on your side, helping you fully analyze the circumstances so you can help your portfolio thrive.

With the help of real estate agents, lawyers, and other professionals, you can come up with a much more robust, economically agnostic strategy – and make money in almost any conceivable environment.

If you’re ready to get started, contact us for a free consultation today!

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