Rental Income during market decline

[Wade Stahle]

Hello BP,

I have a question for everyone who has experienced a market decline in their local area. Say I am investor with 20 units and those buildings decline in value by 50% over a short period of time. What happens to rents? Do they go down? Do number of tenants go up? How hard is it to keep tenants? It would be very helpful to have insight from someone has experienced this and tips on how to weather the storm during a market downturn. 

[JD Martin]

The value of the property has zero bearing on the ability to rent the property or the market range available for the property. In other words, a market decline on your 20 properties only comes into play if you a) need to tap equity in the property, or b) need to sell the property to satisfy debt. Otherwise, a property rents what it rents for whether it's worth a dollar or a hundred thousand dollars. 

Most markets won't experience real estate value declines and rental declines simultaneously unless the population base is contracting, i.e. the death of a boom town, or a demographic migration (say from the Rust Belt to the Southwest). Often, when a market declines, the number of people willing to sell will contract because people want to get top dollar for their house (unless they have to sell). That means less property available, which will push some buyers into becoming renters. Further, real estate market declines are often tied to economic declines, which will reduce the ability of some people to get a mortgage, pushing them into becoming renters. 

The more important factors in whether or not you weather an economic downturn is how much reserves you have, what level of vacancy you can survive, and your overall ratio of leverage to equity. If you are 100% leveraged, you better have a hell of a reserve fund. If you are 20% leveraged, you probably won't even know there's a market downturn. 

PS: Smart investors make serious money during economic downturns, snatching up under-valued assets. This includes real estate.