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5 Advantages to Real Estate Investment During a Bear Market

Whether you’re in stocks, crypto, or real estate, you are likely to feel the effects of a bear market. The effects ripple across all sectors, and even the savviest investors are likely to face some losses. However, those savvy investors also know how to use market downturns to their advantage. With a sound strategy and a long-term approach, you can set yourself up for future success.

In this article, we will cover some of the unique advantages to real estate investment during bear markets. As always, this article is for informational purposes only and not to be taken as investment advice.

A long track record of recovery

Some investments lose value during recessions and never reach the levels they previously achieved. Industries and companies rise and fall, but certain assets will always be in demand. Real estate is on a short list of assets that have appreciated consistently decade after decade. 

As outlined in the chart above, single family homes have increased in value during any given 10-year period since 1965. The uptrend is remarkably consistent. Even with the housing crash of 2008, the market returned to its historic trendline within a few years, and roughly doubled in a decade’s time. 

Real estate’s long-standing track record of recovery presents an excellent opportunity to enter the market and reap the rewards during the next cycle. Taking a position during bear market can be intimidating, but there is over half a century of data indicating that you shouldn’t be too worried.

Real estate is a stable asset

During bear markets, its vital to consider the volatility of an asset. Volatility acts as a force multiplier – in a bull market, volatile assets tend to increase in value substantially, while in bear markets they tend to drop substantially. 

With this in mind, it stands to reason that assets with low volatility are safer bets during bear markets. The numbers demonstrate this to be true, and more – in the past year, the S&P 500 is down about 15%, while the Zillow Home Price Index is actually up 14.9% in the same timeframe.


Offset losses with passive income

Unlike many investments, real estate produces reliable passive income in the form of rental payments – predictable cash flow unaffected by company performance or market conditions. In fact, cap rate on residential properties often increases slightly when property values decrease. 

Passive income is always a plus, but it becomes even more valuable when the market turns sour. Most of your investments will have sluggish growth, so the ability to add a new income stream can help mitigate losses. An over-reliance on market speculation increases risk, but the addition of passive income creates a more predictable investment portfolio. 

Protect yourself from inflation

Investment losses aren’t the only thing to worry about in a bear market – even fiat currency can lose considerable value. Inflation can slowly eat away at your wealth with you ever realizing anything changed. The rates of inflation are particularly concerning in the current economy, with the Euro Zone reaching 10.7% and the United States sitting at 7.7%. This is effectively a tax on your fiat holdings.

Hedging against inflation is crucial to protecting your wealth. Real estate in the USA has consistently met or outpaced the rate of USD inflation since at least the 1940s. When factoring in passive income streams, holding real estate instead of fiat has historically put investors significantly ahead of the curve.

Avoid overpaying for overvalued properties

During hot real estate markets, properties are often sold in bidding wars with multiple buyers driving the price up. When this happens, the purchase price often shoots well above market value. This frenzy can cause other properties to shoot up in the area, creating a localized real estate bubble. Buying in these conditions puts you at risk of getting caught in a correction. 

In a bear market, properties are much less likely to be inflated by bidding wars or local bubbles. You will find that prices are much more reasonable, and your average investment cost will be much lower. While some investors might be afraid of “catching a falling knife”, real estate’s low volatility and consistent price movement make this outcome much more unlikely than with more speculative assets.

Conclusion

As the old saying goes, “the time to buy is when there is blood in the streets.” That is to say, smart investments during bear markets can lead to massive profits when the bulls take over again. 

Because of its historical reliability, passive income opportunities, and low volatility, real estate can be solid investment choice during a bear market. That being said, always do your own research and consider the risks and benefits of every investment!

Note: This article is for informational purposes only and not to be taken as investment advice.

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