How does real estate perform during a recession?

Question

I'm just concerned my six months worth of reserve will be enough. RE as a community we always talk about the wins. That's important. But I'm just wondering how RE performs during recessions. What happens when unemployment rises a high amount?

I was asking a manager in a meetup and he actually said tenant quality increased because a lot of people who were foreclosed on were now renters. Not trying to sound happy at others misfortune, just stating a data point to get the conversation started.

Russell Brazil · Answer

It is going to be market specific.

During the previous recession of 2008-2011, rents skyrocketed in my market and tenant quality improved.

Joe Splitrock · Answer

@Alex Silang just keep in mind that you are on a real estate forum. Survivorship bias means the only people responding to your question either:

A. Survived the last recession.

B. Started investing after the last recession.

I rented to a landlord after the housing crash that lost his home and rental properties to foreclosure. My point is that some failed and some thrived. This is true of real estate agents and builders. Recessions are a thinning of the herd and weaker businesses fail to make way for stronger.

Success depends on what market you operated in, what investments you had and how you managed them. In todays market, anyone can succeed. This is important for people to understand, so they don't confuse their luck for skill. You need to be twice as smart in a down market.

Aaron F. · Answer

Some people like to own their properties cash for this reason. How different would reserves look with no mortgage? A place could sit vacant 10-11 mo/year and still be able to pay the taxes and insurance. It’s a much different stress position.

Allen McGlashing · Answer

@Alex Silang

This is why cashflow is so important I feel. Even during a recession you should be able to pay your mortgage. If you have to lower the rent and just survive that is an option also.

History repeats itself, there will be another recession and then another boom. I think cashflow is so important to get you through the rough times.

John Morgan · Answer

Invest in C+ class properties and you’ll be set. High risk with A and B properties. So I stick to blue collar hoods that will have the highest demand when the economy tanks.

Joe Villeneuve · Answer

Same with mine.

Jaron Walling · Answer

@Alex Silang Good on you to consider that scenario. I'd rather have liquid reserves and cash to bounce on a good deal than just buy whatever comes my way.

I did some research on my market and looked at the numbers during 08-12 and what I found was really interesting. Where I invest the property values decrease by around 8-10%. That's nothing compared to the bigger high priced cities. I'd guess rents went up because I paid more every year to rent similar houses during college. I'd do research in your market and find old articles and studies. Like @Russell Brazil mentioned it's market specific. Learn from history and be prepared along the investment journey.

How does real estate perform during a recession?

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