Ever since I watched "The Big Short" I've been intrigued by the 2007-2008 real estate market crash...and while I know that the crash was caused by loose lending standards combined with ARMs, uninformed borrowers, limited to zero due diligence, mortgage backed securities/CDOs and Wall Street I have yet to wrap my head around one thing. It's very easy to see how a significant drop in property values would destroy development companies, flippers or basically anyone with a short term buy/sell strategy. However, I haven't been able to comprehend how a long term buy/hold investor would be significantly negatively impacted by fluctuations in the market...assuming of course that you have a property with a tenant that passed your screening criteria, you adequately prepared cash reserves for repairs/maintenance and cap ex, bought your property with a fixed mortgage, and essentially took the processes advocated for here on BP, I don't see how a long term buy/hold investor for rental properties would get burned? Except for maybe that the drop in market conditions increases their vacancies because of lost jobs or some macro economic factor of that nature...so I guess in short my question is this: is rent significantly affected by a drop in property value and is it enough of a fluctuation for even a solid buy/hold investor to go under? Thanks for the insight!
On the margin, people that feel less secure about their job situation will be less likely to move into more expensive rental situations.
Owners that are concerned about the market will be less likely to upgrade their properties, which will keep rent increases down since tenants would always be able to move to upgraded properties that had to lower their rent prices to attract tenants.
If people begin to leave an area due to lack of employment, rental unit vacancies will increase, putting more pressure on landlords to either lower their rents or at least keep them flat to keep their tenants. The other option for landlords would be to lower their screening criteria just to get someone in their unit.
There can also be more of a longer term issue with people moving away to cheaper rents, sacrificing commute time in exchange for making their paycheck last longer.
And of course, in a down turn, property values are cheaper, making it easier for those that have employment to stop renting and move into their own home.
I think you both make good points but in general rents trend upward. Property values also trend upward. If property values go down it does not necessarily mean that rents also go down, they certainly could and making sure that you have a good margin (ie cash flow) will off set that risk. The more cash flow you have per unit the safer the deal is. If you have cash flow and continue to have it through downturn you should come out the other side with even more cash flow since you will have opportunities to pick up more cash flow while everyone else is selling.
There were buy and hold investors who got wiped out in the last recession from vacancies. There were buy and hold investors who rents did not skip a beat. It's market and location specific.
And all cycles are different. Credit went away in 2008 and 2009 and that drove people into rentals. The next cycle may not throw rentals a life preserver (or it may, no one knows).
@Treivor Cashion , many investors (eg. those who were not over-leveraged in the first place) were not "negatively impacted by fluctuations in the market" at that time - but rather, saw their opportunity to become even wealthier, by accelerating their investing - buying up big!
Those same investors are: looking forward to the next "big short"!...
Awesome stuff! Thanks guys! Appreciate all the input
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