Risks in owning rental properties at times of economical crisis

14 Replies

Hi, I own several multifamily residential rental properties in the less economically stable areas of MA and RI.

Is there a typical behavior for residential housing at times of economical crisis?
Should I expect to lose rent because of people losing their jobs and unable to pay rent?
Or maybe the opposite because people lose their houses and move into renting instead?

I imagine there is no conclusive answer to that, would like to hear people's thoughts.
Thanks.

People always need a place to live. If you have high end properties then that might be a concern.

The unemployment rate is at an all time low.

The economy is doing exceptionally well so there is no need to worry anytime soon in my opinion.

Very very location specific.  During the great recession of a decade ago, there were places where rents literally went to zero for some people as there simply were not tenants available at any price to fill their vacancies......and then there were other locations where rents went up huge amounts, because homeowners got foreclosed on and created way more tenants than normal.

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Multifamily is one of the safest asset class in a downturn.  Like someone has said, it is very market specific.  Class B and C are best.  Class A will get hit.

How many units are your mutifamily residential?  1-4 unit, prices will drop since it's based off of comps.  larger multifamily will fare much better.

Here is the data to back it up:

https://www.cbre.us/research-and-reports/US-Multifamily-Research-Brief-February-2019

Originally posted by @Russell Brazil:

Very very location specific.  During the great recession of a decade ago, there were places where rents literally went to zero for some people as there simply were not tenants available at any price to fill their vacancies......and then there were other locations where rents went up huge amounts, because homeowners got foreclosed on and created way more tenants than normal.

Agreed Russ  there were clusters in the GFC   PhX   ATL   FLA   Central CA  Vegas were particularly hit hard and many landlords lost their properties including apartments that were max leveraged.. 

what I don't agree with is there is going to be a mass foreclosures like 08 and all of a sudden past homeowners are flocking to rentals.

reason I think this is literally million if not millions of homes have been sold in the last 10 years with those buying 5 to 10 years ago not only getting a very good price but they got incredible rates.. so their payments are FAR less than rent..  why would they walk away only to pay more for inferior living ..   job moves health divorce not withstanding. 

And in the state I am in today Oregon its now state law that you can put an ADU on any R 1 zone as long as you meet set backs and parking.

so just my musing this morning. not to mention one last thing those that are smart get their homes paid for especially low end homes so why would they move from their paid for house.. there are a lot more free and clear personal resi's than I think investors imagine.

@Jay Hinrichs Yeah, the thing with a decade ago, is it has given everyone PTSD. Combine that with the element of recency bias, and now everyone thinks what happened there was a common occurrence. It was in all probability, a once in a generation event.   And even in the face of this once in a generation great recession/collapse.....real estate still ultimately remained local.  We had places with unbelievable rise and falls, and other place where things were moderate. Even in my own market, some areas had moderate falls, some huge falls, and we had some neighborhoods go up in value during the collapse.  And no one can read the tea leaves.  People who were right look like geniuses, but its a statistical probability that someone is always going to guess right and look like a genius, and someone will guess wrong and look like a fool.  The truly smart people though know that the difference between the geniuses and fools is just a lucky couple of guesses.

My only opinion on investing in residential is investing in A class, appreciation dependent properties. Buy in good protected C, B markets for cash flow, you can ride any downturn.

Originally posted by @Russell Brazil:

@Jay Hinrichs Yeah, the thing with a decade ago, is it has given everyone PTSD. Combine that with the element of recency bias, and now everyone thinks what happened there was a common occurrence. It was in all probability, a once in a generation event.   And even in the face of this once in a generation great recession/collapse.....real estate still ultimately remained local.  We had places with unbelievable rise and falls, and other place where things were moderate. Even in my own market, some areas had moderate falls, some huge falls, and we had some neighborhoods go up in value during the collapse.  And no one can read the tea leaves.  People who were right look like geniuses, but its a statistical probability that someone is always going to guess right and look like a genius, and someone will guess wrong and look like a fool.  The truly smart people though know that the difference between the geniuses and fools is just a lucky couple of guesses.

the other thing I look at in my little bubble I operate in..  I can count on one hand how many of the 220 plus homes I bought rehabbed and sold from 2000 to 2008 that did not use minimum down or no money down and or paid cash.

now as I have morphed more into new construction and build at 250 homes in the last 6 years or so.. almost 1 in 11 o12 is being sold for cash. most are conventional..  And for sure in the high end..  just in the last 18 months in Charleston I sold one for 720k cash one for 2.2 million cash and another for 500k cash.. and this is just me on my little new builds in that one area.. in Portland like I said when I built 20 to 25 homes in a little community about 1 in 10 go for cash.. that was just unheard of 15 years ago.. you know all that dead equity talk and you cant eat equity and your a fool to have real estate paid for  etc etc.. 

I would be more worried about automation of unskilled jobs more than a recession if you are in low end multi family. I think a lot of jobs will be going away in the next 10 years especially if $15 per hour min wage starts taking off in a lot of states.

The question I ask myself is "Can your (real estate business) weather a 30% downturn for 12 months?"  Be familiar with possible worst case scenarios and have a plan B, C and D in your back pocket. 

Secondly, history never EXACTLY repeats itself; before the Mortgage Crisis, it was the Dot.com bubble.  If I had to wager black or red, I'd put my money on the App bubble.  There's a field people are mindlessly pilling money into with zero understanding because it's "trendy"; 90% of apps will unlikely ever see the light of any iPhone screen. But alas, I'm not a gambling kind of girl any more, nor an economics expert, so I do my research and make the best decisions I can.

If you've really got down and dirty with your analysis you know that you've either bought in a stable market that will weather the storm, or your high risk investment is worth the ROI to take a bit of a hit on the downturn. There are statistics and newspaper articles a plenty that will tell you the history of the last economic downturn in the town you've purchased in. Do a little digging, Google is your best friend! Well, after BP! :)

Very location specific question. I built my portfolio in the GFC when houses were cheap and we had no problem getting tenants. In fact rents didn't even soften to any great degree. However you have said your portfolio is in unstable areas so if I were you I would be exiting those while the market is good and buy-in better areas. Shoot em up areas always do badly in a downturn unless you are loaded up with Section 8 in which case no need to worry.

As many have said above it's hard to see a big downturn coming, unless some incompetent socialist gets hold of the reins of power.  Then you all need to come and live with me in New Zealand where sanity still exists!

Originally posted by @StevieAnn Nance:

The question I ask myself is "Can your (real estate business) weather a 30% downturn for 12 months?"  Be familiar with possible worst case scenarios and have a plan B, C and D in your back pocket. 

Secondly, history never EXACTLY repeats itself; before the Mortgage Crisis, it was the Dot.com bubble.  If I had to wager black or red, I'd put my money on the App bubble.  There's a field people are mindlessly pilling money into with zero understanding because it's "trendy"; 90% of apps will unlikely ever see the light of any iPhone screen. But alas, I'm not a gambling kind of girl any more, nor an economics expert, so I do my research and make the best decisions I can.

If you've really got down and dirty with your analysis you know that you've either bought in a stable market that will weather the storm, or your high risk investment is worth the ROI to take a bit of a hit on the downturn. There are statistics and newspaper articles a plenty that will tell you the history of the last economic downturn in the town you've purchased in. Do a little digging, Google is your best friend! Well, after BP! :)

these are good points about what causes down turn recession and they are basically never the same at least the ones I have lived and worked through.. coming into the industry in 75 76 it was Vietnam war wind down  economy not great.. then you had the Carter 18% interest rates then you had the S and L crisis.. then at least in SF Bay area and CA in 89 to 92 was a huge downswing in real estate values.. caused by earthquake and war .  which caused lots of buyer to freeze.  then you had Y2k  dot com bubble 911 all within a few years that caused some issues but market rebounded and then of course the mother of them all starting in 07 and lasting till about 2011 or so mortgage crisis and free fall in values in many areas..   Whats next ??? 

@Amit M. Trade war might cause material price to rise. It also might reduce foreign buyers in some markets. Immigration cutbacks might cause labor costs to rise. What would be nice would be for those apprenticeship programs that got ramped up in last couple years to get enough reasonable contractors available.