What happens to SFH rental income during recession ?

Question

Am a SFH rental investor, though, relatively new. I have not seen the prior recession(s). Would like to pick the expert brain of yours on specific questions pertaining to rental income during recession :

• Do tenants typically lose jobs ? If so, how do they pay rents ? Or, do they stop paying , or do they use credit card or savings for the rent payments?
• Do the tenants purposely damage the property per their frustration on the economy ?
• Do the rents go down ? 
• Does these last through the recession period ?
• Overall, what should the landlord be prepared for ? In my case, my rentals are all financed properties

Thanks in advance

James DeRoest · Answer

Originally posted by @Mani Swagath:

• Do tenants typically lose jobs ? YES
•  If so, how do they pay rents ? THEY DONT
• Do the tenants purposely damage the property per their frustration on the economy ? NOT THAT I"VE SEEN
• Do the rents go down ? YES
• Does these last through the recession period ? YES
• Overall, what should the landlord be prepared for ? In my case, my rentals are all financed properties. LOTS OF CASH

Here's the thing, you should be worried about these things, and you should have a backup plan. This is exactly what caught investors out in 2008, and it cost people not only their portfolios, but their own homes, marriages, etc. They had never planned a downside to leveraging, and those that had, discovered that their own income was susceptable to the downturn as well.

Plus, it's no good betting on your equity in a property. When prices go down, your equity is first on the bonfire.

A lot of people before 2008 would not listen to reason about this stuff, and it cost them dearly.

This is why I don't agree with people taking 30 year mortgages on investment property. You'll go broke long before you own the property.

Pay down your properties as fast as you can. Then I won't be buying them from you in 5 years.

Jerry W. · Answer

@Mani Swagath, for the most part I agree with @James DeRoest.  When they lose their job most get unemployment for quite awhile.  In my area they sell of their toys like campers, 4 wheelers and guns, etc.  Well guns are usually last.  Then they dip into their retirement before finally going broke.  I try to help when I can but if you are not firm you will be last to paid when money gets tight instead of first.  I have a tenant now who lost his job on a workover rig.  They are behind about 2 weeks on rent and I have them on a plan.  They have 2 new cars (one is a dam nice Camaro), and a pickup, a boat, and a few other toys.  Rents often drop a little, but not that much.  I have seen 3 bad recessions now, and while my cash flow is not great, I use 15 year loans.  I could easily consolidate a loan or 2 or extend my mortgages for longer times and drop my payments pretty dramatically.  It is good to have lots of equity for these things.  It is pretty rare for rental demand to drop off much.  Some folks move in with their parents, but most find a way to survive.  They often move to a cheaper place as well.

Penny Clark · Answer

I try to have at least six months of PITI cash reserves for each rental. This is what underwriters require before you can qualify for a loan for a new investment property.

Penny Clark · Answer

@Mani Swagath, I agree with all of the above. Unemployment is the major reason why tenants stop paying rent, followed second by medical issues. Both changes affect a tenant's ability to bring in income and that means you don't get paid. Having cash reserves is the ONLY way to hedge your bet against an economic downturn.

Jeff Gates · Answer

Cash reserves

Robert Melcher · Answer

Rental income, in my experience, lags economic troubles.  People don't immediately leave a city, and most downturns are brief.

What does happen, though, is the market gets better for buyers.  Nobody has the security to buy so if you get your good cash position set now, in the next 18 months you might find some sweet deals.

Robert Melcher · Answer

@Peter Sik What? you haven't gotten the dozen or so daily messages that collapse is imminent? That the "ratio" is showing worse than it has in the last four downturns?

Just saying that leverage is great, as long as you keep a cash position to back it up in case everything goes to south. When everybody else is defaulting, you can scoop deals.

Mike Dymski · Answer

I try to invest in properties and areas that do fine in both up and down markets.  My property values likely went down in the last recession but rents did not...actually went up a little.  The stock market tanked, my friends and colleagues took a big hit and rent checks kept coming in.

Thomas S. · Answer

In the case of a tenant getting into a financial bind, whether it be from recession job loss or medical, as a landlord it is never a good idea to "help them out" as this inevitably leads to financial loss for the landlord. Becoming a social worker for tenants beginning the fall onto hard times is a recipe for disaster. There is little room for compassion in business as it does is place the landlord in the same position financially as the tenant. You should take immediate action to replace a failing tenant with a good tenant before you get in too deep.

If a recession happens be prepared to act quickly in replacing tenants. There is always another applicant waiting that still has a income that you need to snap up before the other guy.

What happens to SFH rental income during recession ?

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