What happens to rentals during an economic crash?

Question

For those of you that have experienced it what happens to rentals in a crash? I would imagine investors who mainly have rentals would fare better then those flipping. I'm always looking to plan for the worst. If you could go back, what would you do differently?

Dawn Anastasi · Answer

In this last crash, in my area, house prices went down.  More foreclosures.  People couldn't pay their mortgages anymore because they lost their jobs. Even when they got new jobs they were then behind on their mortgage and couldn't catch up so they were foreclosed on.

The benefit to me is that I was able to buy properties for pennies on the dollar and the people that used to own, now are renters until they can buy again.  Cheap houses and more renters = the perfect storm for me.

Now let's say this happened again.  If it happens soon afterwards, there is a portion of the renter population that have doubled up their households.  So now, instead of one family living in a house, people have learned to share and combine households.  So you'd have less impact as people are not 100% recovered from the last time.

People who were trying to sell a house, however, when the crash happened all of a sudden the house that they wanted to sell for $1.2 million and could have all day long in 2005/2006, now had to wait years and wind up selling for $755,000 (true story).

Jay Hinrichs · Answer

@Dawn Anastasi

or more like 600k  true story on the high end all over the country.

I do have some fears of certain markets were they are flooded with rentals.. WE saw that a little bit in certain markets were rents soften because of supply and demand.. however seems to be stable at the moment.. the real risk is it the Gov decides to wake up and lower the HUD subsidies to market rates.

Steve Vaughan · Answer

Initially I lost some good renters to the 1st time homebuyer tax credit.  Shortly tho, demand for my affordable 2 bedroom apts went through the roof and rent rates shot up like crazy.  We had our normal small family and college-type renters plus a new influx of folks who overbought their houses and lost them.   I wasn't selling and I didn't buy a bunch of SFRs at the peak of the bubble, either.  Maybe the lesson is diversify a little.  SFRs are only worth what a comparable sale just brought.  An apt building's worth is a function of income.

Mike H. · Answer

That is one of the risks. If we ever had a real depression and nobody could afford rent, then landlords would be in trouble and probably would lose their houses. But thats true of any business in an absolute depression.

At the end of the day, it still comes back to having cash flow. The more you have on your deals the less likely you'll be in a situation to lose it all. I'm sure some landlords ran into some trouble during this recent recession.

As lots of people lost their jobs, they probably had to do more evictions which meant higher vacancy rates at first. And if they were breaking even or even losing money on those homes as part of an appreciation play, then they were really in trouble.

But if you buy right and have solid cash flow, then even if your occupancy takes a big dip during the initial phase of the bust while jobs are being lost, you can typically still weather the storm. And then, what has to happen is that you end up with more renters because they have lost their homes and can't qualify for mortgages any more so rents go up and occupancy rates go way up and you make out like a bandit.

For me, my biggest fear is that the lending environment returns to its loosey goosey ways and lets everybody qualify for a home loan again. If that happens, then all the renters disappear. Home prices shoot way up again as there is more demand. And then I have no choice but to sell.

That would be my biggest fear of a worst case scenario. Because I absolutely believe the greatest value in investing in real estate is in the buy and hold model. Where you make money several different ways (i.e. net rental profits, principal paydown, appreciation, tax benefits, etc) that all end up building your net worth more than any other investment vehicle out there today.

Mitch Stanley · Answer

I was talking with a woman who volunteered that during the Depression in 1929, her  Great Grandfather  had ~10 SFH that he rented. Regrettably, people could not afford the Rent.she said , and he Lost all of his  SFH in the area. The Parable (s) to this story-

Have Cash ,Gold Or Silver  to carry one through  a possible period of extended  decline.

* SFH - Single Family Home

Thank you, Mitch Stanley

Realtor

Keller-Williams Biltmore

Phoenix,AZ

Ryan Dossey · Answer

Thank you guys that's kind of what I imagined.

What happens to rentals during an economic crash?

Most Popular Reply