If you lived in the desert next to a well and a group of weary pilgrims happened upon you on foot – pilgrims who had run out of water miles ago – do you think you’d have any problems selling water to these travelers? Then if word gets out to other pilgrims that you sell water, chances are you’d have a steady business and reliable income from this business.
In the United States, there is a group of weary customers thirsting for a different type of water – affordable housing. The customers number in the millions, and their thirst for affordable housing is insatiable.
The current housing crisis started long before it made front-page news post-COVID. Housing insecurity in the United States predates the COVID-19 pandemic.
It all started in the wake of the Financial Crisis (2007 to 2009) as demand for rental housing increased as the millions of people who lost homes downsized to apartments and other types of rental housing. Because of the mortgage crunch, the supply of new rental housing units nosedived.
With people losing homes and people who were previously looking to buy squeezed out of the housing market, the demand for rental properties skyrocketed. And nowhere was demand higher and supply lower than in the affordable housing pool, and that gap has only widened since the pandemic.
Like selling water in the desert, investing in demand is a surefire strategy – especially in something with bottomless demand like rental housing. And in the wake of economic uncertainty, investing in demand ensures protection from recession and inflation.
In the face of recession and inflation, consumers scale back on wants and stick to needs. Affordable housing is a need, and investing in it is an ideal hedge against recession and diminished income and buying power. And although the prices of many goods and services fall in the wake of falling demand, some assets experience solid demand and even price bumps. These assets possess a “sticky” demand that sticks around even in the face of recession and inflation.
Rental housing – especially in the affordable sector – is an asset with “sticky” demand built to withstand any impending recession. This resilience was on display in the face of recent inflation. As prices rose, so did rents, and rising rents are resilient because higher rents rarely reverse.
That’s due to the long lock-up periods associated with lease agreements (typically 12 months). During the latest bout of inflation, renters were stuck with increased rental rates for 12-month periods at a time, and upon renewal, those rates only got higher.
Assets like rental housing with “sticky” demand are the ideal hedge against recession and inflation as people scale back on luxuries and cling to necessities. Investors should be chasing this type of demand for consistent and reliable income shielded from market volatility. However, when chasing demand and investing in something like rental housing, don’t just look at the steady income that will stem from consistent demand; there are other benefits you shouldn’t overlook.
These benefits include:
Tangible assets with high demand, like housing, have intrinsic value – value in and of itself and independent of what buyers and sellers are willing to pay in the open market. This intrinsic value boosts the appreciation of these assets over time – in addition to normal price rises from inflation.
High Risk-Adjusted Returns.
Rental housing generates higher returns than other options but does so at reduced risk because of its non-correlation with Wall Street.
Passive income is the key to wealth, and the key to passive income is partnering with seasoned experts in particular market segments and geographic locations to eliminate the high knowledge, capital, and time commitment hurdles of doing it on your own.
Real assets – primarily when invested passively through partnerships – offer a variety of tax benefits, including business deductions, regular depreciation, bonus depreciation, long-term capital gains treatment, avoidance of self-employment taxes like FICA, and other benefits like tax deferral through 1031 exchanges, etc.
Leverage and Scaling.
Bank financing can be leveraged to compound buying power and income. Instead of buying a single asset with cash, that cash can be used as a down payment to increase buying power by 4-5 times. One income stream becomes 4-5 income streams. Leverage increases wealth exponentially – even when accounting for debt servicing.
Investing in endless demand is how you can protect and enhance your portfolio in the face of the next recession. And there are fewer assets with higher demand than affordable housing right now.
Investors who invest in this endless demand will ensure steady income and growth for years.