A key risk: If the market goes down and also pulls down the rental values -- that is, such a downturn could impact the cash flow and not just the appreciation returns. If the cash flow dipped below expenses, you could be spread "too thin." Two ways to protect against that:
1) Modest leverage: if your mortgage payments are below even a reduced rental income profile, you'd be more protected.
2) Counter-cyclical rentals. If your rental isn't luxury, such that it maintains (or builds) demand in a downturn, then you're more protected.
Happy new year, and good luck.
When properly positioned...adequate cash flow, adequate cash reserves, maximum leverage, sufficient # of doors....you should not be at risk. Keep in mind the bank does not want your property they want your money.
The risk of a down turn comes primarily when you have not prepared financially, have too few doors to spread the losses and you have too much equity (you lose your equity in a down turn).
Concentrate on B markets to insure a solid tenant base regardless of economy. There will always be a pool of tenants that have lost their homes in a downturn economy.
if my rents don't change but perhaps overall value decline would it still be concerning if I am on a fix mortgage.
By fix mortgage, do you mean a fixed rate mortgage? If that’s the case, nothing changes because the interest rate is fixed regardless of any changes to property values, interest or the economy in general. This is a big reason many investors will tell you to look for cash flow instead of appreciate. Regardless of what happens to the FMV of the property, you’ll continue to cash flow positive.
If you buy a property for $100,000, rent it for $2,000/month, and pay $1,000/mo in expenses (including the mortgage), you earn $1,000/month in profit.
If the real estate market crashes and suddenly your property is only worth $50,000, and you can still rent it for $2,000/month, and pay $1,000/mo in expenses — then the value doesn’t matter (as long as you don’t want to sell it). Even if your mortgage I was for $70k and now you have a $70k mortgage on a property worth $50k, it’s okay because you’re still getting that cash flow, and after a few years pass, history has taught us that property values will rise again.
And even if the market dips, the property is now only worth $50k, and you can only collect $1,500 in rent, you’ll still be able to cover the $1,000/mo expenses and collect a profit. Your mortgage payment won’t change unless you refinance.
* cash flow instead of /appreciation/, not appreciate. (Sorry, on my mobile!)
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