How to Recession-Proof Your Real Estate Business in 2023
Use These Tips to Protect Your Real Estate Business From the 2023 Recession
Use These Tips to Protect Your Real Estate Business From the 2023 Recession
Jacqueline Kyo Thomas
A recession is no fun for anyone, but it can be especially stressful if you're a real estate agent who’s operating your own business. During a recession, you can no longer rely on the safety net of an expanding economy. Everyone’s watching their coins and not spending any more than they should.
What can you do to weather this storm and ensure that your real estate business remains afloat?
Although hearing about a looming recession may cause you to feel worried, don't panic. There are a few things you can do right now to prepare for the choppy waters ahead. Let’s discuss.
First thing’s first, let's define what a recession is. Most of us have a vague understanding of the term “recession,” but it’s useful to work from a shared definition.
The US economy is cyclical.
It cycles through four stages on repeat: Expansion, peak, contraction, and trough. A contraction is another word for recession, and it occurs when there's been a decline in economic activity for two or more consecutive quarters.
Recessions always occur after there's been a peak in economic expansion. During an economic peak, the country's gross domestic product (GDP)—i.e. the market value for all U.S. economic activity—has reached its max for that particular cycle. After the economy peaks, it begins to contract. Productivity decreases, which means less work and, as a consequence, more unemployment. Of course, when people lose their jobs or have to manage with lower wages, they spend less. This makes the economy contract even further.
No one can accurately predict how long a contraction will actually last. Recently, in 2007, the U.S. experienced a recession that lasted two years. However, the longest and most deeply felt economic downturn in the last 100 years is the Great Depression, and it occurred over the span of 10 years, from 1929 to 1939.
Economists predict that the next economic contraction will begin sometime in the latter half of 2023. The recession is a response to a mix of factors, including inflation, and the Great Resignation, interest rates, and the ongoing war between Russia and Ukraine. The consequences of these factors have led to supply chain issues, increases in the costs of food and gas, and noticeable hikes in the price of living in general.
In an economic downturn, both businesses and consumers will tighten their proverbial belts and spend less money. This contributes negatively to the recession.
In the years since the pandemic first began, home prices have skyrocketed. Competiton among buyers is fierce, with many waiving inspections or engaging in bidding wars. But now that there are fears of a looming recession, and interest rates are rising, many would-be buyers are considering stepping back from the market. In response to this lower demand real estate values could decrease. At a minimum, we can expect buyers to have a less stressful time when house hunting as compared to the past few years.
But someone’s always in the market to buy property. And some actually prefer to buy during a down market. For some forward-thinking buyers and investors, a recession presents the perfect opportunity to purchase while demand and competiton for properties is driven down. It can also be harder to secure lending during a recession if incomes have fallen, so those who buy are more likely to have the liquid assets on hand to do so.
A recession is one person’s calamity and another person’s opportunity. Your mission is to find those people who are excited to buy and sell during this time. And they do exist!
In addition to that, it’s also important that you take a few steps to prepare your business for this upcoming period of economic contraction. Here’s what you can do now:
Auditing sounds ominous and difficult, but it's not hard at all.
Auditing your business, in the broadest sense, means reviewing your financial records and identifying any problems that can derail your future success. You need a clear understanding of how much you're making each month, how much is in your bank account, and how much you're projected to make within the next month.
With that in mind, you then need to create a simple and easy-to-follow financial plan for your real estate business and your personal needs. Ask yourself:
Even if the economy is contracting, that doesn’t mean that your marketing efforts need to do the same. Now’s the time to get even more active with your marketing, especially online. Social media marketing is affordable and packs a huge punch. By playing it smart, you’ll be able to attract new prospective clients and build stronger relationships with those in your current network.
One of the best ways to market yourself is through video. You can use video to educate prospective clients, position yourself as an expert, and build a rapport that gets prospective clients to trust you. Check out these posts to improve your marketing efforts:
No matter what the economy does, it’s always a good idea to diversify your income. Having all of your eggs in one basket is too risky. But, as a real estate agent, how can you diversify your income?
Fortunately, there are a lot of ways to bring in extra (and dependable) cash during these moments of economic uncertainty. Here’s a quick snapshot of what you can do:
Start establishing multiple streams of income now, not later.
In addition to having multiple streams of income, you can also expand your own specialty. Most agents have a real estate niche that they’re comfortable in, whether that’s single-family, luxury, starter homes, vacation properties, duplexes, condos, and the list goes on. However, in difficult economic times, it often doesn't make sense to stick to the same old inventory. Difficult economic times mean that it's time for you to start learning new things, and to be agile in your business.
Fortunately, as a licensed real estate agent, your license lets you work to work in many different types of real estate. So, don’t limit yourself to working with the same old types of properties and clients!
For example, many agents stick with residential properties, but now may be the time to jump into commercial. Or maybe you've always worked in sales, but the rental market in your area is strong. It's time to explore expanding your business. These expansions won't only help you in a down market, either: when the market gets stronger, your newly expanded business will continue to grow with it. And who knows, you may find a whole new area of your business that is not only profitable, but that you enjoy more than what you're currently doing!
Check out our guide to becoming a commercial real estate agent here.
Regardless of the economy some businesses will always thrive (and in many cases this is because of a recession, not in spite of one). These include health care, grocery stores, and discount retailers. Many successful businesses are started during recessions, and those looking to start businesses during this time will need your help to find properties for purchase or lease. So, if you're looking for a sign to hop into commercial real estate, this is it.
If you don’t want to become a commercial agent, there’s another option to consider: Start investing in real estate. For example, you could find a real estate investment trust (REIT) which is a company that owns and/or operates real estate that generates an income, or look for investment properties yourself.
Hold on to the cash that you have on hand and start building an emergency savings fund. Your initial goal? Have at least one month of emergency savings and work your way up to six months in savings. If you can save enough for an entire year’s worth of living expenses, you’ll have protected yourself from a ton of worry.
Re-evaluate what you spend. Make sure that every dollar has a job, including those going to savings.
Start paying off your debt, too. It’s best to pay down as much debt as possible before heading into a recession. This gives you more available runway if you ever need it.
The taxman comes whether we're in a recession or not.
Because you're self-employed you're responsible for seeing to your own taxes. If you were employed by an organization, your employer would deduct your taxes and pay them on your behalf, but since you're not working for anyone else (which is the typical arrangement for real estate agents), you'll have to manually pay those income taxes.
Instead of scrambling to find the money when tax season comes, always be sure to put aside a little money with each commission. Your future self will thank you.
Your network is your net worth.
In a recession, it’s important for you to strengthen the relationships that currently exist. You can leverage these relationships in the future to continue to grow your real estate business.
Investing in your network won’t just impact your current relationships but it will give you the chance to get more referrals. Those in your network may not be ready to buy just yet, but they may know others who do. Be sure to let everyone know that you’re taking on new clients. If you’ve expanded your niche, let them know that, too.
Invest in your network by doing the following:
Recession-proofing your real estate business won't happen by accident. Implement the above tips to improve your chances of coming out of the recession reasonably unscathed.
Hopefully, the recession doesn’t last long, but it never hurts to be prepared. Remember that the next recession is always looming.