I am a new investor in the DC area trying to get my investing career started with a rental property (or perhaps a BRRRR). Whether you are a seasoned or newbie investor, I'm sure that a potential recession is at very least in the back of your mind when looking for your next acquisition.
My question is two fold:
1. What happens to rents during a recession? It would make sense that as homeownership numbers fall, the demand for rental properties would increase. However, wouldn’t it also make sense to say that as unemployment rises in a recession, supply of rentals also increases (which would even out the increased rental demand)?
2. What are some of the most effective ways to recession-proof an investment property?
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.
@John Paul Whaley I just listened to episode 311 this morning that is titled 6 Rules for Investing in Real Estate in the Coming Economic Shift. It is more focused on flipping then rentals, but might be worth a listen if you haven’t heard it yet. Here is the link:
@Russell Brazil. That’s because Washington DC was the only area that appreciated during the recession. Thank the political class taking care of themselves. Also hardly relevant to the discussion
If you are buying low income because of the low entry price point, know that poor people always get screwed first and hardest when hard times happen. To recession proof:
you could rent at least some of your units to old people who get social security.
if your places are nice enough to pass the inspections, you could go section 8 and get paid by government.
rent to married couples ...then there is some money even if one person loses a job.
Accept SSDI recipients. When I first started, I got a bunch of calls asking if I would accept someone who "gets a check" and a caller actually explained that they meant social security disability income (SSDI)-- you know, a 'crazy' check. Most get only $750/month so if they don't have additional family support, they often supplement their income by renting to couch surfers, selling drugs, selling plasma, and when possible, doing odd jobs for cash. In the best case, there is a (non-crazy) relative who is the payee, has decent credit and is willing to co-sign. It has been my experience that many times the relatives have crap credit and are crazy too. The SSDI recipients are far too frequently ripped off by their payees. (I do know that not all SSDI recipients get a check for being crazy but this was the explanation given to me by a person that was both getting a check for crazy and pretty definitely nutso)
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.