Winterizing Retirment in a Recession

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Last week I was having a conversation with my dad about retirement. Like most people, the majority of his retirement investments are done via his 401k. I came away from that conversation thinking, “If I was in his position what would I be doing right now.” Taking into account down international markets, shifts in leading housing markets like Dallas, and the current trade wars, being ready for a recession is the obvious answer.

The European, South American, Chinese, and Mexican economies are all currently in an economic slowdown or recession. In Europe, the UK’s growth is stagnant. Britain ‘s economy contracted 0.2% for the second quarter after a minimal 0.5% advance in the year’s first period. The German economy, which is heavily dependant on automotive exports, is also slowing down due to an international slump in demand. Italy has been in a recession since 2018 and is sitting at about 30% youth unemployment. Mexico, America’s third largest trading partner, is similarly dealing with its second consecutive down quarter.

All of that begs the question, is the Trade War with China the straw that breaks the camel's back? No matter your political persuasion, we can all see the swings in America’s stock market every time new news is released on its happenings and the billions in subsidies doled out by the United States just to keep the agriculture industry above water. China has long been a leader of global economic growth, but is slowing to a near 30-year low of 6.2% in 2019 despite the Chinese government's quantitative easing. Many economists predict that economic growth in China could slow to 4% as their economy continues to mature. Central bankers have been hoping that Chinese fueled growth would justify the levels financial assets in the U.S. have reached, with stock and bond markets pushing records. But with China’s maturing economy causing a slowing of global growth financial assets are creating a bubble. When the market finally recognizes that low interest rates are not fueled by growth, be prepared for that bubble to burst.

Speaking of bubbles, let’s not forget about the booming real estate market America has had the last 5 or so years. Housing markets across the country have experienced tremendous growth. Most reaching or exceeding the prices prior to the collapse of the market in 2008. That combined with low inventory and low interest rates have driven a seller’s market. Recently however, leading markets have been experiencing a shift. Dallas is a perfect example. As of January 2019, 78.9% of all ZIP codes in Dallas have shown signs of shifting in favor of buyers, according to Trulia. The number of houses on the market has also gone up 24% with the number of sales down 3% and prices only up 1% from the same time in 2018.

So with all these indicators of a pending recession, how does someone planning to retire in the next three to five years mitigate losses and stay on track? The long and short answer is a smart investment in multifamily property. As returns in the market slow or turn into losses, rental properties continue to cash flow, often offering 10 to 15% cash on cash returns. Then, when the market rebounds, you have the potential to sell the property and liquidate your investment or carry the note and act as a bank for a new buyer, making your money on the interest they pay.