What happens if rental property value goes down?

[Zeeshan Mallick]

Hello Everyone,

This is my first post on BP, as I just made my account a few moments ago, so please excuse me if my forum post is not formatted correctly.

I am looking to buy my first rental property around July 2020, however I am a bit reluctant because there is one scenario that kind of scares me.

Let's say I buy a rental house for $275,000 in July 2020.

3 years go by and as I am paying principal and gain equity on the house, I have accumulated, say, $30,000 equity on the house (sorry if this is not a realistic number, just for sake of example)

But let's say that the housing market crashes or takes a dip from 2020-2023 and the value of this rental home dropped in this time period from $275,000 to $195,000.

What exactly would happen to my equity in the property because of the drop in market value of the house? Also, would I still be paying a mortgage worth $275,000 if I did a 30-year-fixed mortgage back in 2020? Is this a realistic scenario, and would it even effect me negatively if at the end of the day if I am simply just trying to cashflow each month from a rental?

I know it is seen as trivial to try and time the housing market, but a scenario like this kind of scares me because I am young and inexperienced. But my question is, is this even realistic, and if it is, would it even effect me if I am just trying to cashflow off rent each month?

Sorry in advance for my ignorance on the subject and thanks in advance for guidance and consideration.

[Aaron K.]

You wouldn't just have no equity but negative equity, however unless rents take a dive too the property would still cash flow, even if not as much as other properties that would be available.  This happened in the 08 recession to quite a few people but that was an extreme event, could it happen? Yes.  Is it super likely probably not, but nobody has a crystal ball on markets.