Do rents/multifamily housing decrease when overall economy tanks?

Question

I have acquired several units in the last 3 years, and many were off market good deals after I rehabbed and increased rents. What are your opinions about the real estate market? In Oregon and surrounding areas have been steadily going up for the last several years. It’s been 10 years now since the 2008 recession and wondering how long home prices and rents will continue to rise ? I know no one has a crystal ball but they say RE runs in 7 year cycles, and if this happens will rents drop ? Or, do rents stay steady out there?

Thanks for your input.

Thomas S. · Answer

Rents are secure in multi unit blue collar and for me following the last dip in 2008 I still raised rents annually. My cost went up every year so rents had to rise as well although less than in the previous years based on the cost of living index. People still have to live somewhere and need to pay based on a landlords costs and margins.

Obviously some did not do as well based on their chosen tenant demographic and geographic area. Higher quality/higher income earning tenants are a riskier investment market. Markets above B class are at a much higher risk for landlords.

Nathan Gesner · Answer

Rents don't generally drop like property values do. Of course, property values dropped in 2008 like they never did before so there are always exceptions.

If you talk to the investors with decades of experience, they'll tell you that the blue-collar rentals are usually safe. These are the back-bone workers  that won't see wild fluctuations in their income or employment. In my area, anything under $1,000 a month is pretty safe while houses over $1,200 can be volatile when the energy industry takes a hit like it did in 2016. I can barely rent a single-family house right now, even with significant price drops of 20% or more but apartments and houses under $1,000 are renting like hot-cakes.

Wesley W. · Answer

It's very specific to your market and the nature of the downturn.  Is there a major employer in the area?  How are they being affected by the economy?  What's the rental inventory like?  Is there a lot of vacancy?  What kind of neighborhood?  A/B/C?  One mode of thinking is that the cheaper rentals suffer less from a downturn, since "they gotta live somewhere" and some renters from the higher end units will move down until the economy rebounds.  I've only been in the game since the last downturn in my market, so I can't give a specific anecdote.

Rodolfo Canon · Answer

All real estate is local. Real estate markets are efficient. Supply and demand determine prices and rent rates.

The chart I posted below looks at the business growth across the US in all markets. It clearly shows to where business are starting and to where they are migrating. Colorado looks good. The Denver MSA looks great. Population growth follows the business growth. "Hey, I can get a job in Denver. Unemployment rate is 2.6%, inbound population migration has been strong and steady."

Denver entered the 2008 real estate crisis earlier than most cities, fell less in value, and returned to growth quicker than other cities of similar size. Why? Because of local economic drivers.

There is on such thing as a 7-year nationwide real estate market cycle. In Denver, over the last 45-years, the average "cycle" has been 17-years.

Understand your local market, the economic drivers behind its success or failure and make your decision.

This chart is from the Economic Innovation Group.

Michael B. · Answer

I personally love investing in MSHDA/Section 8 properties. I decrease the downside by working with a PM that knows how to screen these types of tenants.  On the upside, the government pays all or part of the rent. If the economy worsens and people lose their jobs -> more tenants for me. Also, the middle class has been shrinking by 11% since the 70s and that trend is continuing -> more tenants for me. The state of the economy doesn't really matter in my kind of scenario.

Patrick M. · Answer

Good article in today’s WSJ predicting a slow down. Barring market specific factors, I am very confident in the MF market.

I believe SFH will feel some pressure but not MF, unless it is self inflicted.

Michael B. · Answer

@Todd Powell I buy in Michigan right now. I can't find the cash flow that I'm looking for in CA. That's my most recent deal:

Hays Deal

Todd Powell · Answer

@Michael B. what area of Cali are you buying your properties? Thanks

Do rents/multifamily housing decrease when overall economy tanks?

Most Popular Reply