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I don’t know when the next recession will strike. It could come over the next year, or in five years from now. 

But I do know that sooner or later, another recession will rear its ugly head. And I don’t want my portfolio to collapse when it does. 

Every month, I meet online with dozens of other investors to vet a new passive real estate investment, as an organizer of SparkRental’s Co-Investing Club. When we vet investments together, we consider risk first and foremost. And one of the risks that we consider is, “How would this investment hold up in a recession?”

While no investment is 100% recession-proof, some real estate investments perform better than others in recessions. So which investments offer the best protection if the economy takes a turn for the worse?

1. Multifamily With Some Form of Rent Protection

If a tenant is lucky enough to score a rent-controlled unit that goes for hundreds less than the going market rate, they’ll move heaven and earth to keep it. They won’t default on rent until they’ve exhausted every possible path to paying it. 

But rent-controlled units offer just one example of many. In the Co-Investing Club, we invested last year in several properties that set aside 50% of the units for affordable housing. The operator partnered with the local municipality and agreed to cap rents based on local median incomes for those units—in exchange for a property tax abatement. The tax savings adds far more cash flow than was lost on market rents. 

Those units have a waiting list to this day, and in a recession, they’ll still likely maintain 100% occupancy. 

In another case, we invested in a “Section 8 overhang” deal, where the operator bought a Low-Income Housing Tax Credit property, and used a loophole in LIHTC regulations to replace all the tenants with Section 8 voucher holders. They keep the tax credits, collect full market rents, enjoy a government guarantee on most of the rental income, and have an avid renter base that doesn’t want to lose their voucher benefits by defaulting. It, too, will do just fine in a recession. 

These are just a few examples of rent-protected units that become even more coveted in a recession. 

2. Tenant-Owned Mobile Homes

To begin with, mobile homes offer the ultimate affordable housing, and tend to do just fine in recessions. But investors can protect themselves from rent defaults even better by renting mobile home lots for homes they themselves own. 

Fewer of these renters default, because lot rents are cheap, and it’s so expensive to move a mobile home. And if a renter does default, it’s easier for park owners to evict them from a land lease than a typical residential eviction. 

Keep an eye out for mobile home park investments specializing in tenant-owned homes, rather than renting out park-owned homes.

3. Student Housing

In recessions, many young adults opt to skip the bad job market and go back to school. That keeps demand for student housing high, even in recessions. 

Just make sure you protect against all the usual risks of student housing investments, such as property damage and higher turnover rates. 

4. Self-Storage

In the Great Recession, the only property type that didn’t suffer losses was self-storage. 

Why? Because in recessions, people tend to either downsize or move in with family or friends. Both options leave them with less room for their stuff. They need somewhere to put their Furby collection, so they rent a storage unit. 

Unfortunately, many local markets have become oversaturated with self-storage facilities in the years since the Great Recession. Before investing as a fractional owner in a storage facility, do your homework on the local market and competition. 

5. Healthcare Facilities

People still need medical care, regardless of the economy. That provides recession resilience to some healthcare facilities.

Some—but not all. Sure, patients still visit the cardiologist after a heart attack, but fewer people go in for cosmetic and other elective surgeries. If you want recession protection, look for healthcare facilities that service the fundamentals. 

Assisted living facilities can also prove recession resilient, depending on the segment of the market they service, and the local competition. Look for facilities with a long waiting list, indicating plenty of local demand relative to supply. That demand will likely soften in a recession, as some families consider moving in together rather than enrolling their loved ones in a nursing home.

6. Some Industrial Properties

When it comes to recessions, not all industrial properties are created equal. 

Data centers, for example, do just fine in recessions. If anything, people spend more time at home sitting in front of their computers during recessions. 

Likewise, industrial properties that manufacture necessary consumer goods like toilet paper  hold up well. 

But those that specialize in luxury goods or elective services? Expect them to struggle in a downturn. 

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Diversification vs. Concentration

I have no idea what the next hot asset class will be, or the next hot market. The same goes for the inverse: I don’t know which properties will struggle in the years to come. 

Trying to get “clever” or to time the market are fool’s errands. Every time I tried to get “cute” with my investments, I lost. 

Nowadays, I invest $5,000 each month in real estate, as a form of dollar-cost averaging. I now own a fractional interest in around 3,000 units, spread across the U.S., in every property type. I invest as simply one more member of SparkRental’s Co-Investing Club, spreading small amounts of money across many markets, property types, and operators. 

As I get to know an operator better, I’ll invest more with them. But in the beginning, it helps to invest small amounts before betting the proverbial farm. 

Remember, recessions hit different cities differently. Some experience deep depressions, with sweeping job losses and business closures. Other cities see virtually no change at all, or even grow. Diversifying geographically helps you reduce your overall recession risk. 

What Real Estate Investments Do Poorly in Recessions?

Class C and D multifamily properties that charge market rents tend to see spikes in rent defaults and vacancy rates in recessions. The same goes for many retail properties and office buildings. Some businesses go under in recessions, and others consolidate or switch to remote work and servicing. 

House flipping and wholesaling businesses also struggle in recessions, as home prices drop. If the after-repair value drops by 5%, that can wipe out the entire profit margin on a flip or wholesale deal. 

High-end vacation rentals often sit vacant in recessions. Fewer families can afford to spend five figures for a week in Cape May, so they plan more reasonable vacations while the budget is tight. 

Finally, watch out for deals financed with short-term debt, and those with thin cash flow. In a recession, investors need the ability to ride out the bad market. That means they need longer-term financing and strong cash flow so they don’t find themselves losing money each month. If you have the luxury of time, you can wait out the rainy season until sunnier days come along. 

Read up on these additional risks that our Co-Investing Club checks for as we vet passive investments as a club. You can’t eliminate risk entirely, but you can certainly find asymmetric investments offering low potential risk and high potential returns. 

The Upside of Recessions for Real Estate Investors

On balance, recessions are no fun for anyone, real estate investors included. But they do come with several silver linings.

First, interest rates plummet. That makes it cheap to borrow, letting investors refinance high-interest debts or buy new properties with low-interest loans. 

Speaking of buying, property prices tend to dip. That creates plenty of bargains for investors intrepid enough to keep buying while everyone else panics. In 2009, the average home price dropped to $208,400. Bet you wish you could buy average homes at that price today!

Recessions also clear out some of the less-capable competition, who had been over-bidding and otherwise overcrowding the market. 

Like the forest fire that clears the underbrush and makes way for new trees to grow, recessions are painful but necessary. Just make sure you plan for them so they don’t burn down your portfolio, like they have for so many other investors.

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