What Does a Recession Look Like?

[Paul Anglin]

I have started investing in SFH rentals as a means to diversify my retirement income. I'm probably a decade or more away from retirement, but one of the major items I'm trying to plan for is a recession. My current business plan is highly leveraged as I'm trying to add properties as quickly as possible.

I am very new to this, and reading everything I can get my hands on, but this is a topic I haven't run across yet. That in mind, what does a recession look like for a rental portfolio? Making an uneducated guess, I can see one of two things happening. 

1. The first would be a major economic downturn will force lots of people out of jobs, and it will suddenly become very difficult to find tenants. Worst case, properties go unrented and I have to find a way to pay the mortgage on a portfolio of unrented homes. This would make rentals a high risk with regard to recession planning.
2. The second would be that same economic downturn forces people to lose their homes, and they are then driven to look for rentals to live in. Which would make rental properties a very safe hedge against a recession.

I'm sure I'm way oversimplifying this, but I'm hoping someone with experience can give me some ideas about how a recession would affect a rental property portfolio.

Thanks in advance!

[Christopher Brainard]

Hi @Paul Anglin and Welcome to BP!

Scenario 1 is unlikely, but it probably won't happen exactly like 2 either. Although it will be harder to find quality tenants, it is unlikely that rental rates and occupancy will drop significantly, unless you're in a secondary market. Rental rates will take a small hit if the recession persists a while, simply because people won't be able to afford quite as much. Lots of people will lose their homes, making short sale and foreclosure opportunities abundant. As long as you can hold long term, rentals are a pretty safe bet. If you need to liquidate and we're in the middle of a recession, you would be in trouble. Far too many people were overleveraged in the last recession and ran into this issue, which amplified the problem. 

-Christopher