Rental Market is Untested in a Recession

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Rental Market is Untested in a Recession

Michael Temple
Rental Property Investor · Toledo, OH · Member since 2017 · 257 posts · 215 votes

I came across this article this morning in the Wall Street Journal. Hopefully, everyone can get to it without hitting the paywall.

https://www.wsj.com/articles/t...

Just in case you do hit the paywall, I will do a quick summary. The gist of the article is that our "asset-light" economy where more people than ever rent homes, lease cars, and use streaming services for entertainment has never been tested in a recession. We have this new model that has emerged after the 2008 great recession where people have decided owning stuff is no longer a priority. Instead, they want to essentially rent (lease, subscribe, etc.) to all the things they use in life. This model has never really been tested in a bad recession, so what happens? Do any of these people that serve as our tenants suddenly leave our rentals to find cheaper digs, dump their car leases, and stop subscribing to Netflix? The article basically says we don't really know.

It is an interesting question. If you bought property based on being able to achieve a certain level rent and in a bad recession people simply leave and find a lower rent place and nobody will rent your place at your pre-recession level that you depended on to make all the numbers work what is your contingency plan?

I am not sure I have one personally, but I am at least thinking about it now. I know one of the main arguments I hear from people when I have suggested this, albeit in a different form, is everyone needs a place to live so we are all safe. That is true, but at what level of rent do they need a place to live? That is the question here. They may need a place to live, but they may not need to live in YOUR place and pay YOUR required rent. They could just move to a cheaper place to weather the storm and then find a nicer place later. They are mobile and largely uncommitted to large fixed monthly expenses. They may leave some people with high debt loads on rentals in bad shape. 

Thoughts?

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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
6y

My contingency plan consists of several things:

1. Owning most of my properties outright: As someone who has lost a lot of money on RE before, I am probably more conservative financially than most people on BP. If you don't have to make a mortgage, you don't need a whole lot of money to see a return, even if the return is paltry. It also allows me to drop rents significantly if ever necessary to keep units rented. I could suffer more than 50% vacancy across all my properties and still be profitable enough to live off my investments. 

2. Owning my properties in a steady growing Sunbelt area: the trend in the US has been from North to South, East to West for over 40 years now and really doesn't show any signs of abating. Cost of living + climate virtually assures a steady stream of retirees, which will continue to put pressure on housing where I live. I feel, barring some apocalyptic scenario, this will continue at least until I'm dead.

3. Renting above Section 8 levels but below luxury levels: my homes typically rent for $750-1200. Anything less than that gets you an apartment where I am, and the apartments are not likely to get much cheaper. I can absorb anyone falling down the ladder, and most people will cut out Netflix before they go homeless. I'm also not dependent on government subsidies for housing.

4. Having a "day job": I'm close to retirement but still healthy and working. Everything the rental business generates goes back to the business or reserves. 

5. Having SFHs: I can sell off anything that I feel doesn't make enough money any more rather than keep it as an albatross. It's a little bit of diversification rather than owning 1 or 2 apartment complexes that require selling to an investor (and losing all of your units at once). 

So I feel pretty protected from everything but a disaster, in which case all bets are off anyway. As for the WSJ article, there's some truth to it, but home ownership levels are really back at a sustainable level than where they used to be. If anything, I suspect home ownership will continue to decline over time. Besides, home ownership is lower than the US in a number of European countries (Germany, Austria, for example) and it hasn't been a economy crusher there. In some ways, firms/professionals owning the homes and renting them out is more efficient than a ton of people owning their own homes - as evidenced by the poor condition many homeowners keep their homes. In theory, owning a home should provide you housing stability - you never truly "own" the home, as you have to pay taxes at a minimum - but for homeowners that are not handy and are broke, you often see the homes deteriorate to the point of worthlessness, until someone like the people on BP swoop in and buy the wreck, invest $50k and turn it back on the market. Without that happening, the supply of housing stock would stay stagnant or even decrease, putting more pressure on the housing market. 

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  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    My guess is student debt is the next area where instability will occur.  

    What I have seen over my life is that in downturns, location matters. And many landlords will allow small discounts in rent to keep good tenants. (I know i asked for, and recieved a 100/mo discount in the 08 recession) ...

    The other two critical factors are cash reserves and debt. It makes me cringe when i see folks bragging about having massive amounts of debt with a  small amount of cash flow off of each property. This is a recipe for disaster. I really hope I am wrong.  Leverage is a tool, but should be used wisely. 

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  • Michael Temple
    OP
    Rental Property Investor · Toledo, OH · Member since 2017 · 257 posts · 215 votes
    6y

    @Mary M. I think you may be right about the student loan debacle. This goes to @Jan Kerr's point if you know where to look you can often times see this coming. I have been through 2 of these now. I went through the dot com crash in early 2000-2001 and the housing bubble in 2008-2009. In both cases, I knew something was wrong before the crash came, but I didn't know what. In the dot com crash, I was actually working in a start-up and saw first hand the disaster unfolding around me, but being young and not having seen an asset bubble before couldn't put all the pieces together before I got stung.

    Now we are (have been) hearing about the issue in student loans for a long time. I think that will be a crisis (or already is), but I am not sure since the government is directly involved with student loans if it will be a crash per se or just a long-time decline and crippling of what could be a far better economy.

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  • Patrick M.
    Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    One does not have to see a recession to "be ready" for it. I admit, I enjoy the financial pieces in the press, but a landlord who has built a proper business model can withstand a recession, even one like '08. In fact they can thrive.

    I wager this recession will be caused by the (lately) non-stop talk of recession, which will erode consumer spending which is the life blood of our economy. Smart people will realize that their student loans are unsecured debt and that walking away from them will be a short term hit. The stupid people with the 7+ year car loans and revolving credit cards will go down, as they always do. There are plenty of slums and slumlords who will welcome them as they make room for others who can afford.

    A person who has 3 SFH rentals that are tits up in debt may go down- but he could go down at any moment on any vacancy or bad tenant. And he should go down if the market wills it.

    The wise are prepared, the unwise are in fear.

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  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    6y
    Originally posted by @Patrick M.:

    Smart people will realize that their student loans are unsecured debt and that walking away from them will be a short term hit.

    What do you mean short-term hit? Federal student loans never go away. They will haunt you until death. Your paycheck will be garnished, your tax refund seized, and decades from now your Social Security will be garnished. Private student loans, with rare exception, don't go away either. You will be sued, have your paycheck garnished, have your bank account levied, and have your credit destroyed. 

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