Bear markets, which are marked by a drop in values of 20% or more, can happen in the real estate or stock market, temporarily crushing prices. While they are no fun to endure if you're actively invested, they can be a tremendous time to load up on new real estate investments since prices are down.
As a newbie investor in the last major bear market (the Great Recession), I failed to make important investment moves, and I've regretted that terribly.
We're not in a bear market as of yet, but market volatility and downward-trending real estate values have investors worried one could be on the horizon. To avoid being wracked with regret from failing to act, here are three real estate moves you should make when the next bear market comes around.
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1. Buying an income property while real estate is cheap
Rental property can be an incredible long-term investment, one that provides reliable passive income and growth as real estate values increase. Recent real estate values are nearing record levels and have made the last few years a challenging time to buy rental property on the cheap.
Buying property at a lower price increases the chance of a greater return on investment (ROI), increases cash flow, and leaves more wiggle room for rental rate fluctuations, vacancies, or increased expenses over time. A real estate bear market should be a shopping spree.
Just keep in mind that lending often tightens during bear markets, making it more difficult to borrow money to purchase a rental property. So it's important to have some liquidity to help you take advantage of these market opportunities.
2. Investing in REITs
Real estate investment trusts (REITs) were created to help everyday investors have access to institutional-quality assets like multifamily housing, self-storage facilities, retail shopping centers, office buildings, and countless others that are often out of reach. With over 200 publicly traded REITs to choose from, they are a fantastic way for investors to gain broader exposure to the real estate market without having to own or manage physical property -- at a fraction of the price.
Many REITs are in bear territory, down 20% to 40% or more from recent highs despite the broader market remaining in correction territory. This means right now is the perfect opportunity to load up on these dividend-paying investments.
Plus, dividend yields increase when share prices are down. So by purchasing shares now while prices are lower, you're increasing your yield today and in the future, thanks to the power of dividend increases over time.
3. Investing in high-growth real estate stocks
REITs and rental properties aren't the only way to invest in a bear market. High-growth real estate stocks, often tied heavily to the real estate brokerage or tech industry, can be another avenue for gaining real estate exposure and taking advantage of favorable pricing.
Industry innovators and disrupters like Opendoor, Zillow, WeWork, Airbnb, or eXp World Holdings have promising growth prospects for the long haul. While there's always a chance these investments won't pay off as hoped, buying shares near rock-bottom prices undoubtedly increases your chances for an incredible return if it takes off.
Real estate bear markets don't last forever; prices eventually rebound and often surpass pre-bear market highs. If you don't take advantage, the opportunity will pass you by.
