What happens to rents during a recession?
Member since 2019 · 44 posts · 12 votes
What happens to rents during a recession?
Most Popular Reply
Rental Property Investor · Detroit, MI · Member since 2015 · 82 posts · 548 votes
7yHello,
These are great strategies, I prefer to invest in area's where I can do cash deal and not have a massive mortgage. Here in Detroit, You can purchase a property for under $30k and rent it out for between $700-$900/month. So you'll have very low cash invested and if there happen to be a recession, you wouldn't have a mortgage payment, so you can just lower the rent. For example in a high market your house rent for $800/month, then in a recession your tenants of 5 years have to move because they lost their job, you could offer them to stay at a reduced amount of rent say $400/month until they get back on their feet. Since you don't have a mortgage payment your only expenses would be taxes, insurance, and maintenance. For small repairs like broke door knob, or leaky faucet, you could have the tenants fix them themselves since your already reducing the rent and you can appeal the county to lower your taxes because the value has gone down. If you had a mortgage you wouldn't be able to lower the rent because you'll have to make a mortgage payment and wouldn't want to have your expenses higher than you income, so you'll be forced to find another tenant. So that my friend is a recession proof investment. Please check out my podcast episode #331 for more info about Detroit.
31 Replies
- Real Estate Broker · Kirkland, WA · Member since 2018 · 549 posts · 411 votes7y
@John Paul Whaley Different areas are affected differently by recession. Here in my area, we hit bottom a full year or two after everyone else did and we recovered faster too.
Other areas still have never fully recovered from 2008.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
In the DC area rents rose during the last recession
District Invest Group545 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
@John Paul Whaley what you are saying is true. When people can't afford homes, they often do rent, but they may also move. The main factor driving housing demand is jobs. The areas that lost jobs had more vacancy and the areas that gained jobs had pressure on rents to go up. I think the DC area did well during the last recession, partly because government jobs grew. Detroit tanked because of the auto industry. Florida struggled because of the hit to tourism. You get the point.
One other thing to consider is when there is a recession, you get more co-living. Kids move back home with mom and dad or families share spaces. So in any recession, less total housing is needed. Usually the pressure is on higher end properties, as people look for lower cost options.
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
- Member since 2019 · 44 posts · 12 votes7y
Thanks everyone! I hear DC is not the worst place to invest when you have worries about a pending recession, I was just curious about areas all over the states.
- Rental Property Investor · Detroit, MI · Member since 2015 · 82 posts · 548 votes7y
Hello,
These are great strategies, I prefer to invest in area's where I can do cash deal and not have a massive mortgage. Here in Detroit, You can purchase a property for under $30k and rent it out for between $700-$900/month. So you'll have very low cash invested and if there happen to be a recession, you wouldn't have a mortgage payment, so you can just lower the rent. For example in a high market your house rent for $800/month, then in a recession your tenants of 5 years have to move because they lost their job, you could offer them to stay at a reduced amount of rent say $400/month until they get back on their feet. Since you don't have a mortgage payment your only expenses would be taxes, insurance, and maintenance. For small repairs like broke door knob, or leaky faucet, you could have the tenants fix them themselves since your already reducing the rent and you can appeal the county to lower your taxes because the value has gone down. If you had a mortgage you wouldn't be able to lower the rent because you'll have to make a mortgage payment and wouldn't want to have your expenses higher than you income, so you'll be forced to find another tenant. So that my friend is a recession proof investment. Please check out my podcast episode #331 for more info about Detroit.
- Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes7y
@John Paul Whaley - great questions.
At the Midwest Real Estate Networking Summit last weekend, @Neal Bawa mentioned that at a national-level rents only dropped 2.8% in the deepest of the 2008 cycle. You need to further dive into specific cities and classes (A,B,C) to get a better idea of each sub-market, but overall it was only 2.8%. It's also important to note that he mentioned vacancy and concessions were up so the overall impact was more than the 2.8%, but overall, the general statement was rents remained relatively stable.
@J Scott also has a recent book on recession-proof investing which you can find in the below link along with a BP thread of investors asking him similar questions : https://www.biggerpockets.com/forums/48/topics/671005-j-scotts-recession-proof-real-estate-investing-ask-me-anything
- Rental Property Investor · Davenport, FL · Member since 2013 · 285 posts · 220 votes7y
During the recession, we were getting people who could otherwise afford a home but were probably too afraid to buy at the time or were having difficulty qualifying applying for our rentals. Our rents kept going up even though home prices were down. Recently with the market strong and interest rates low, those qualified people now seem to be buying homes and our quality of applicants has gone down, causing us to reduce our rents. I imagine when interest rates go up and home affordability goes down, there will be more demand for rentals and rent will increase once again. This is what we're seeing in our market anyways.
- Real Estate Broker · Minneapolis, MN · Member since 2016 · 530 posts · 398 votes7y
@John Paul Whaley
You can recession proof by always ensuring you are buying with a strict rule of cash flow and not over leveraging your properties.
Generally in a recession rents will rise due to demand for renting options vs. buying. Mortgage arenas tend to weaken making buying properties even more difficult.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes7y
You should buy smart to ensure strong cash flow that can handle rent reductions if the market slows. I also think B and C-class properties are more recession proof than A-class. A-class properties are harder to cash-flow and they'll sit empty if the market drops because that's one of the biggest expenses for a family and downsizing/downgrading is one of the easiest ways for them to save money.
The DIY Landlord Book4.7248 Reviews - Rental Property Investor · Miami Beach, FL · Member since 2018 · 27 posts · 9 votes7y
@John Paul Whaley I love DC and if I lived in the area I’d invest. I own a company and our main client is the government. Personally, I love Ivy City and would love to own there.
- Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes7y
I will also add that people moved to DC during the recession because they were looking for secure government jobs. The government isn't going out of business and isn't getting any smaller so that's another reason to invest in DC if you are worried about a recession. I was a DC landlord during the great recession and if you plotted a graph of my DC rents during the last 15 years you would see no dip in my rental income, rather you would see a gradual upward trend as I have been able to increase the rent on my DC rentals a little bit each year whether there was a recession or not.
Now of course my property values took a dip during the 2008 recession but since I didn't sell it really had no impact on my rental business. I can't think of a city that is more recession proof then DC is for buy and hold rentals. My biggest fear when investing in DC isn't a great recession, but rather if a terrorist attack wiped out my rental properties. Luckily some of the insurance policies I have do include a rider for terrorism.
- Rental Property Investor · Sedan, KS · Member since 2016 · 125 posts · 92 votes7y
@John Paul Whaley by happy accident I discovered that investing out in the sticks is basically recession proof. So some reason people out here don't like banks and a market crash isn't going to bother cattle ranchers or oil investors.
Actually the great recession of 2008 was good for me. I was building houses in Wichita, Kansas and hated it. I moved back home about 80 miles away when people stopped building houses.
Housing has somewhat adjusted for inflation but that's about it. I've lived here most of my life and know the area.
- Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes7y
During the Great Recession those overleveraged investors first default like others. Often they let their investment properties in foreclosure and try to keep their principle homes. These who can not afford their mortgage will not been able to pay their rent as well. You do not want them as tenants.
It is utmost important to have 1 year savings to weather the storm while seeking employment. I know many young professionals in Silicon Valley took 1-2 years to find work with lower pay. Most investors here at BP prefer little and low down which means if home values are underwater you can not refin as well. Most go out of business.
Hope that helps,
Sam Shueh
- Real Estate Agent · Palm Springs, CA · Member since 2018 · 19 posts · 12 votes7y
@John Paul Whaley it can put massive pressure on rents. Usually it’s going to negatively impact rent growth. Proof against recession? Have high quality assets in prime locations that are the cheapest relative to the competition. Rentals priced the lowest experience better demand when the economy is lagging.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
@John Paul Whaley what you are saying is true. When people can't afford homes, they often do rent, but they may also move. The main factor driving housing demand is jobs. The areas that lost jobs had more vacancy and the areas that gained jobs had pressure on rents to go up. I think the DC area did well during the last recession, partly because government jobs grew. Detroit tanked because of the auto industry. Florida struggled because of the hit to tourism. You get the point.
One other thing to consider is when there is a recession, you get more co-living. Kids move back home with mom and dad or families share spaces. So in any recession, less total housing is needed. Usually the pressure is on higher end properties, as people look for lower cost options.
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
what really cratered for landlords in GA FLA AZ NV and Central CA was new construction.. its came to a screeching full blown HALT I mean you still see projects in vegas that started and never got finished.. all those construction workers and suppliers basically left town.
So all asset class's were hurt.. I mean MF in Vegas was getting lost because properties had to much vacancy and could not meet debt service or loan covenants, max leverage killed off a bunch of those folks.. And then other markets never wavered.. so answer to this one is its 1000% regional.
And of course with FLA and NV tourism was a double whammy..
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Sam Shueh:
During the Great Recession those overleveraged investors first default like others. Often they let their investment properties in foreclosure and try to keep their principle homes. These who can not afford their mortgage will not been able to pay their rent as well. You do not want them as tenants.
It is utmost important to have 1 year savings to weather the storm while seeking employment. I know many young professionals in Silicon Valley took 1-2 years to find work with lower pay. Most investors here at BP prefer little and low down which means if home values are underwater you can not refin as well. Most go out of business.
Hope that helps,
Sam Shueh
Sam this is a great point.. when folks ask why a rental is lost to foreclosure there is a lot of behind the scenes stuff and one of them is the business owner who finds themselves in trouble and now has to rip his rents and not pay his mortgage this was very prevalent in those days.. and it happens even today.. just too tempting when you have a bad stretch.. so then you have a foreclosure gets posted on the door and most of the time the tenant leaves and there you go a vacant home
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes7y
Originally posted by @Joe Splitrock:
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
This is one of the things I always tell locals who are thinking about investing in satellite areas well outside Pgh in western PA, usually next to a factory or mill in a one-employer town way out in the sticks. The rentals are so cheap out there! Sadly, market conditions in Rust Belt sticks are not the same as agriculture-driven sticks.
Mass layoffs are going to be a fact of life at that factory or mill. Much of the public don't really understand why and when these layoffs will happen in the private sector. They believe that when orders or work drops, well-intentioned, virtuous companies will then be forced to reluctantly lay off people because there isn't enough work for them. It's just a matter of supply and demand.
This is a fairy tale. I've seen factory workers and lower-level managers continue to believe it right up to the moment they get their pink slip and stare at it in wonder. Their friend Barbara's cousin's brother Bill works in the sales office and Bill blabbed to Barbara that orders are still coming in just fine. How could this happen?Landlords can never afford to believe in the fairy tale.
Mass layoffs happen because a company's executives see a recession coming and need to assure active mutual fund managers that their company is still a strong stock investment. Layoffs assist in what is more or less an accounting trick to help make the company look more financially healthy than it is. By reducing existing payroll and pointing to recent production, these companies can claim they're more profitable than they really are. The layoffs don't come when production dips, they comes when the executives start getting nervous about the share prices of their companies, WELL BEFORE the companies ends up in real demand-driven financial trouble. Mass layoffs in the private sector are more driven by perception than performance.
I know plenty of people know this simple economic reality, but not all beginner investors looking to get their first cheap rental or two out in the sticks.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@John Paul Whaley what you are saying is true. When people can't afford homes, they often do rent, but they may also move. The main factor driving housing demand is jobs. The areas that lost jobs had more vacancy and the areas that gained jobs had pressure on rents to go up. I think the DC area did well during the last recession, partly because government jobs grew. Detroit tanked because of the auto industry. Florida struggled because of the hit to tourism. You get the point.
One other thing to consider is when there is a recession, you get more co-living. Kids move back home with mom and dad or families share spaces. So in any recession, less total housing is needed. Usually the pressure is on higher end properties, as people look for lower cost options.
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
what really cratered for landlords in GA FLA AZ NV and Central CA was new construction.. its came to a screeching full blown HALT I mean you still see projects in vegas that started and never got finished.. all those construction workers and suppliers basically left town.
So all asset class's were hurt.. I mean MF in Vegas was getting lost because properties had to much vacancy and could not meet debt service or loan covenants, max leverage killed off a bunch of those folks.. And then other markets never wavered.. so answer to this one is its 1000% regional.
And of course with FLA and NV tourism was a double whammy..
I think that is true of new construction everywhere back in 2009-2012. We built a new home in 2008 and our street was fully built out during 2008. By the end of the year, construction had tanked. They had the next four streets on the development plan and it took four years to build out one street. We had other developments that went bankrupt and we lost probably half our builders. Most of those were small mom/pops. We had 3% population growth all through the recession, but that new housing pace was just too strong to maintain.
I know it was even worse in some markets where investors were buying condos on speculation, hoping to flip them or rent them. On top of that, I think Vegas and other markets had some population loss. Like you said tourism is killer during recession. When you lose your job, the last thing you are thinking is "lets go to vegas on vacation". Which reminds me how much I LOVE vacationing during a recession. Low prices and great service!
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@John Paul Whaley what you are saying is true. When people can't afford homes, they often do rent, but they may also move. The main factor driving housing demand is jobs. The areas that lost jobs had more vacancy and the areas that gained jobs had pressure on rents to go up. I think the DC area did well during the last recession, partly because government jobs grew. Detroit tanked because of the auto industry. Florida struggled because of the hit to tourism. You get the point.
One other thing to consider is when there is a recession, you get more co-living. Kids move back home with mom and dad or families share spaces. So in any recession, less total housing is needed. Usually the pressure is on higher end properties, as people look for lower cost options.
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
what really cratered for landlords in GA FLA AZ NV and Central CA was new construction.. its came to a screeching full blown HALT I mean you still see projects in vegas that started and never got finished.. all those construction workers and suppliers basically left town.
So all asset class's were hurt.. I mean MF in Vegas was getting lost because properties had to much vacancy and could not meet debt service or loan covenants, max leverage killed off a bunch of those folks.. And then other markets never wavered.. so answer to this one is its 1000% regional.
And of course with FLA and NV tourism was a double whammy..
I think that is true of new construction everywhere back in 2009-2012. We built a new home in 2008 and our street was fully built out during 2008. By the end of the year, construction had tanked. They had the next four streets on the development plan and it took four years to build out one street. We had other developments that went bankrupt and we lost probably half our builders. Most of those were small mom/pops. We had 3% population growth all through the recession, but that new housing pace was just too strong to maintain.
I know it was even worse in some markets where investors were buying condos on speculation, hoping to flip them or rent them. On top of that, I think Vegas and other markets had some population loss. Like you said tourism is killer during recession. When you lose your job, the last thing you are thinking is "lets go to vegas on vacation". Which reminds me how much I LOVE vacationing during a recession. Low prices and great service!
agreed.. we went to Costa rica in winter 09 2 weeks all inclusive at top resort for 3k total LOL.. could not afford not to go. marry that with frequent flyer miles and well was a heck of a trip..
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Jim K.:
Originally posted by @Joe Splitrock:
One way to shield yourself is buy properties in a city that has diverse jobs or solid industries. Things like government, medical, universities are all fairly recession proof. Ultimately the most important thing is location. Desirable properties in good locations will always rent.
This is one of the things I always tell locals who are thinking about investing in satellite areas well outside Pgh in western PA, usually next to a factory or mill in a one-employer town way out in the sticks. The rentals are so cheap out there! Sadly, market conditions in Rust Belt sticks are not the same as agriculture-driven sticks.
Mass layoffs are going to be a fact of life at that factory or mill. Much of the public don't really understand why and when these layoffs will happen in the private sector. They believe that when orders or work drops, well-intentioned, virtuous companies will then be forced to reluctantly lay off people because there isn't enough work for them. It's just a matter of supply and demand.
This is a fairy tale. I've seen factory workers and lower-level managers continue to believe it right up to the moment they get their pink slip and stare at it in wonder. Their friend Barbara's cousin's brother Bill works in the sales office and Bill blabbed to Barbara that orders are still coming in just fine. How could this happen?Landlords can never afford to believe in the fairy tale.
Mass layoffs happen because a company's executives see a recession coming and need to assure active mutual fund managers that their company is still a strong stock investment. Layoffs assist in what is more or less an accounting trick to help make the company look more financially healthy than it is. By reducing existing payroll and pointing to recent production, these companies can claim they're more profitable than they really are. The layoffs don't come when production dips, they comes when the executives start getting nervous about the share prices of their companies, WELL BEFORE the companies ends up in real demand-driven financial trouble. Mass layoffs in the private sector are more driven by perception than performance.
I know plenty of people know this simple economic reality, but not all beginner investors looking to get their first cheap rental or two out in the sticks.
Jim For context in the Portland market in 07 we built 9000 new doors in 09 we built 700 doors .. so the reason we have been so stinking white hot in new construction is that Intel built a 10 B factory and brought in thousands.. Nike almost doubled and a lot of other tech came in .. so we were short 8 to 9k doors we need just to keep up with demand.. so by 2012 we were short 30k homes.. its just now back to building maybe 5k new homes or doors a year maybe a few more..
- Member since 2019 · 44 posts · 12 votes7y
Originally posted by @Ashley Hamilton:
Hello,
These are great strategies, I prefer to invest in area's where I can do cash deal and not have a massive mortgage. Here in Detroit, You can purchase a property for under $30k and rent it out for between $700-$900/month. So you'll have very low cash invested and if there happen to be a recession, you wouldn't have a mortgage payment, so you can just lower the rent. For example in a high market your house rent for $800/month, then in a recession your tenants of 5 years have to move because they lost their job, you could offer them to stay at a reduced amount of rent say $400/month until they get back on their feet. Since you don't have a mortgage payment your only expenses would be taxes, insurance, and maintenance. For small repairs like broke door knob, or leaky faucet, you could have the tenants fix them themselves since your already reducing the rent and you can appeal the county to lower your taxes because the value has gone down. If you had a mortgage you wouldn't be able to lower the rent because you'll have to make a mortgage payment and wouldn't want to have your expenses higher than you income, so you'll be forced to find another tenant. So that my friend is a recession proof investment. Please check out my podcast episode #331 for more info about Detroit.
Ashley, I just listened to your episode the other day and really enjoyed it. Thanks for taking the time to speak on the podcast. You make me want to dip into the Detroit market.
- Member since 2019 · 44 posts · 12 votes7y
The more people I ask, the more I hear that DC is essentially a recession proof investment for buy and hold investors. The most common theme I see in regards to the recession-proofing topic is that your first priority should be cash flow. Even if your margins are whittled away during a recession, breaking even is better than losing money every month.
Unfortunately, DC isn’t the easiest place to get started. I have considered long distance investing and dipping into the Baltimore market. Although I am close to Baltimore as well, that is an entirely different market that is more volatile (in terms of recession) than DC.
I appreciate the advice everyone. I will keep you updated.
- Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes7y
I tend to buy all of my investments seeing if I will cash flow at a median rent. If I can make the numbers work at that rental amount, I can ride the wave a bit should rents pull back. Screening your tenants thoroughly though is a factor even when talking about a recession. Having a financially responsible, stable tenant will typically have less volatility and can weather personal transitions to an extent that a recession may bring.
- Realtor · Tulsa, OK · Member since 2019 · 76 posts · 42 votes7y
@Ashley Hamilton sounds like a great market.
- Investor · Boston, MA · Member since 2018 · 61 posts · 46 votes7y@John Paul Whaley like others have said, it depends on the area. The areas that do the best in recessions are those that have a diversified economy. Areas like Vegas (gambling), Florida (tourism), and Detroit (manufacturing) fared the worst in the last recession, and I predict will do the same in the next one. The best example of this effect is Texas. Texas seriously suffered in the 80’s recession because their economy was extremely heavy in oil. By the time 2008 came around, Texas had diversified, and fared better than most other states.
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