Market crash prep

[Coe Davis]

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

[Randall Alan]

Quote from @Coe Davis:

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

@Coe Davis
 I think you are worrying about something that likely won’t happen.  Keep in mind that the housing market is different than the rental market.  The housing market can crash all day long and it will literally just drive up demand in the rental market because people can’t afford to buy a house. 

Ask yourself this:  when is the last time your rent / mortgage payment ever went down?  Or overall prices on cars, or groceries, etc?

It’s not that market rent can’t decrease, it’s just unlikely.  Here’s why:  any property owner… regardless of when they bought their property… is going to charge enough money to pay their mortgage and related expenses, plus make some level of profit.  As expenses increase, you raise your rent to compensate for those increases.  You also raise your rent when the market rent increases because of demand & lack of supply. 

So let’s say inflation goes to 18%, interest rates go to 18%, etc… pick your doomsday scenario…

Every landlord already in the market still has the same (relatively) fixed expenses they did the year before.  They will not lower their rent prices because of economic instability.

Likewise, let’s look at the reverse… everyone bought their property at 12% interest, and now rates are at 2%… are the new landlords who have lower expenses going to market their properties at some big discount to try and undercut all the old landlords at 12%?   I think not… they are going to take advantage of that difference and bank the extra money. Plus, you are going to do a cash out refi and lower your mortgage expense to take advantage of the low rate as well. 

Can you get into a margin squeeze (ie. Is there some risk of losing money in real estate?). If you bought on a thin margin you can end up upside down… definitely… but I would argue the pressure would come from a different direction:  it is more likely that rising taxes and insurance rates will eat up your profits where you don’t make as much or any profit if you bought poorly (ie. Very little profit potential).

The broader point being that capitalist influences will likely keep real estate rents going up.

I can envision a situation where let’s say the ‘big local employer’ closes up and 5,000 jobs goes away and there are no other jobs for that employee base.  Those people  move away and now there are suddenly 1,000-2,000 extra rentals with less demand.  I could see rents deflating in such a situation, but barring a sudden lack of demand like that I don’t see that situation happening,

But to your question, what do you do?  Your exit strategy is to sell the house.  Hopefully you have made progress on your mortgage and also real estate prices moved up in the meantime and you make out with a profit.  You can keep playing out the scenario by saying “yeah but what if I owe more than it’s worth?”  At that point you can often negotiate with your lender to keep the house under a deferral program like people did around 2008, or do a deed in lieu of foreclosure to hand the lender  the property and walk away. 

So while it’s  possible to lose in rentals, it’s unlikely if you bought right.

Randy