For months on end, experts have been sounding warnings about a potential recession. The Federal Reserve has been hiking interest rates in an effort to slow the pace of inflation. It's hoping to achieve that ideal soft landing where consumer spending drops just enough to narrow the gap between supply and demand that's been causing inflation to soar.
But that's a tough balance to strike, so it's fair to say that the risk of a near-term recession does exist, even if it ends up being short lived.
That's why it's a good idea to load your portfolio with investments that are not only moneymakers, but also have the potential to thrive during periods of economic decline. And self-storage REITs (real estate investment trusts) fit the bill in that regard.
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A lot of upside
Self-storage REITs operate self-storage facilities. Some of these companies cater to commercial clients, while others rent out space to everyday consumers whose living situations are in flux, or who simply don't have enough space at home to stash their belongings.
What makes self-storage REITs such a great investment is that self storage isn't particularly trendy. Rather, it's something consumers have a perpetual need for.
Granted, in the wake of the pandemic and remote work, self storage has boomed, largely because a lot of people have reassessed their living situations and moved around a lot in the past couple of years. Also, right now, the housing market is still pretty uncertain, and a lot of would-be buyers are struggling in the wake of sky-high home prices and rising mortgage rates. Many of those who aren't yet able to buy a home and plant roots are no doubt looking to self storage as a safe place to house their belongings as they figure out their next steps.
But it's not just that there's currently a strong need for self storage. The reality is that it's something consumers will perpetually have a need for.
Living situations can shift all the time. Jobs can be lost, and new jobs can be found in different parts of the country. People can move. People can downsize. And through it all, the option to store their belongings is key.
That's one reason self-storage REITs are a solid investment to hold during a recession. Another reason is that self storage is relatively inexpensive. And during periods of economic decline, consumers might continue to pay for it even if they're forced to curb their spending.
In fact, it's easy to argue that self-storage REITs can actually benefit from recessions because when jobs are lost, people often lose the ability to buy a home and pay rent. As such, periods of economic decline could actually increase the need for self storage.
Know the risks, but reap the rewards
There's really no such thing as a risk-free investment, so it's important to recognize that while self-storage real estate has a lot of upside, that's not guaranteed. One of the things that helps REITs thrive is the long-term leases they sign on their properties. But self storage works differently. Self-storage contracts are often month to month, so they don't always offer the same degree of guaranteed income that other types of REITs might be privy to.
But all told, it pays to look at self-storage REITs if you like the idea of investing in a business with the potential to do well in good times and bad. And remember, REITs in general tend to pay higher-than-average dividends, so even if you run into a period where your REIT shares themselves lose value, the dividends you collect can help offset those losses in your portfolio.
