I've had a question for a while. I've read a few books now that all talk about cashflow analysis for a property, but there's one thing I am not sure how to handle. One book I read mentioned how along with boom and bust of house prices, rents will also fluctuate with the market. I've read the rent fluctuations are not as severe though. My question is, how do people account for potential rent decreases with the market when analyzing a deal for cashflow? Are there measures for safeguarding? And is there a way to have an idea how much the rent will decrease if the market goes down for a while?
Reserves, otherwise known as savings, helps us to ride out a down market.
Also, diversification, such as buying in 2 or 3 markets, or across several different asset classes, can also be of help.
I really like Jason Hartman's ideas on this. He suggests that we buy in what he calls laterally moving markets, vs. rolling or cyclical markets. Some places are sensitive to fluctuations due to local circumstances. (Jason has very good response when his name is mentioned...Hi again, Jason! LOL!)
In our case, we bought in a smaller city near an military base. We thought our purchases were in a lateral, steady Eddy kind of market. When oil was discovered nearby, oil patch workers flooded to the area, and our houses literally doubled in value. We didn't sell, as that wasn't our plan. We wanted steady rentals. However, at turnovers, where we had a handful of steady local or military tenants, some oil workers moved in.
When the price of oil fell, several tenants lost their jobs. It wasn't a situation where we could just drop rents incrementally, but rather that there wasn't any money in their accounts. We had enough properties with rent coming in that it didn't break us, but it I could have done so easily, had we been set up differently.
Howdy @Kapil Patel
I do not believe there is a crystal ball that will allow you to predict the degree of a swing in a boom or bust period. The best you can do is try not to over pay for a property. Ensure you set minimum criteria for Cash Flow in your Analysis. Maintain a decent cash reserves to cover vacancies, maintenance, CapEx, and mortgage payments encase of total income loss. Keep your rents in line with market rates. Failing to raise rents to keep pace potentially means a loss of income.
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