Are You "Recession Proof"?

[Account Closed]

I was recently having a conversation with a friend and we were talking about rental properties.  Friend is an accountant with some rentals of his own, and his brother has various rentals throughout the country.  He asked an interesting question that I'll rhetorically pose to the group here.

Is your real estate business recession proof?

[Account Closed]

@Account Closed,

A friend of mine works for the Federal Reserve so he studies this subject and case studies in great depth. At the end of the day, it's about liquidity, liquidity and liquidity.

My partner and I picked a market around a local university. If history is any guidelines, more people tend to go back to school during recessions. Can you say this business model "recession proof"?

In addition to knowing our market, we also stress-tested our portfolio. We wanted to see how much rent drop we could absorb before we break-even. We also wanted to know how much liquidity we need to set aside in case the situation is worsen. Liquidity is what keeping one afloat to weather the storm.

Nothing in life is guaranteed including cash flow. Cash flow can dry up real quick when you can't find tenants for your units. Things tend to hit us all at once when we're most vulnerable including job losses. Again, having liquidity is what would keep us afloat. I see people use 6-12 month reserves. Is that adequate? A real estate down cycle tends to last 3-5 years. Does having 5 years worth of reserves make your business recession proof? 

People like to think their biz is recession proof until it's being exposed and tested. I guess owning assets free and clear plus having a pile of dough in the bank would make your business recession proof.