One more warning to add to Thor's realistic assessment: Inflation that is coming will not "inflate away the value of debt." That type of inflation exists in textbooks, but it's very difficult to find in history books. Hyperinflation is not a cozy campfire, it is a raging wildfire.
Agree: A wave of housing foreclosures and lease defaults has begun. The destruction of capital is clearly coming for homeowners and investors. The market MIGHT be flooded with inventory. Banks will make that decision as they will hold most as collateral. Hyperinflation is coming, but not until we pass through a period of credit contraction and demand stagnation which will create devastating consequences for the over-leveraged and under capitalized. (20% equity with a 50% loss in market value equals -30% negative equity position)
However: (moved 9 to the top as it is the only new point of discussion others haven't fully explored.)
9) Tenant and Landlord relationships will be changed by the force of government. This holds the seeds of destruction for ALL small investors, even cash investors ( not certain, but potential). Expect a fundamental change in private property rights on residential rentals to some degree. This is the biggest unknown and no one has explored it that I have seen. Government will force landlords to shoulder some of the relief for working class and poor renters through changes in the timing, justifications and remedies we have to terminate. Picture our current situation - evictions delayed or suspended just for the last few months have left us all providing free housing with no immediate redress. Under almost any other scenario, this would be considered an "illegal taking" per the 4th Amendment because none of these tenants will repay lost rent and the government is offering no compensation. For those looking for a reason to hide under the bed, this is an excellent one!
1) Inflation hedge is one important reason to own residential rental properties. Although not in lockstep with taxes and insurance ect; rents will eventually reflect the negative consequences of endless money printing. Yes, you will lose market value but much CF will be spared if you are following good management.
2) Hyperinflation by itself will NOT wipe out mostly cash investors, even with massive unemployment. Cash investors should prepare to be squeezed very hard as landlord expenses rise BUT rental rates will stagnate or even drop temporarily in many markets. Afterwards, however, it will create a windfall for some small investors.
3) Affordable housing vacancies will be very low, and new government housing subsidies will be created. Folks, government can't have the streets filled with homeless, jobless, desperate people even if it destroys our currency's value in the longer term. Everyone will shift downward in their housing expectations as unemployment, coupled with inflation, sets in.
4) Expect a bifurcated real estate market, heavily biased towards the bottom. Luxury apartment owners and large SFR landlords WILL definitely drop rents significantly, and more probably, lose units to foreclosure. They will experience the softest demand of all landlords.
5) Credit contraction will kill real estate demand in every price category for 1-3 years minimum. Cash investors and large institutional/hedge fund investors will choose from the best properties but there will be no purchase demand for many properties. Conversely, renters will find a housing shortage and rising rents at the bottom.
6) Small Investors with good CF fundamentals and very solid equity will take a temporary pay cut 1-3 years before seeing rents partially catch up to runaway expenses. Picture the late 1970s-early 1980's.
7) Seller financing will become very important to buyers and sellers during the first part of this next cycle. New opportunities should be sought in this area starting right now while loans are essentially frozen.
8) Less people will own more properties. The rich will get much richer and the middle class will permanently shrink, as in 2008. After all, this is a massive transfer of wealth from the middle to the top. We can disagree about whether it is intentional or sub-sequential, but its existence is a fact.
9) Tenant and Landlord relationships will be changed by the force of government. This holds the seeds of destruction for ALL small investors, even cash investors. This is the biggest unknown and no one has mentioned it that I have seen. Government will force landlords to shoulder some of the relief for working class and poor renters. Just picture our situation now - evictions delayed or suspended just for the last few months have left us all providing free housing. Under almost any other scenario, this would be considered an "illegal taking" per the 4th Amendment because none of these tenants will repay lost rent and the government is offering no compensation. For those looking for a reason to hide under the bed, this is an excellent one!
Conclusion: If your equity position is less than 30%, Thor is offering you the best solution. If however, your powder has been kept dry, the consequences are not likely to be deadly.
John, some great thoughts here! Regarding #9, I'm an attorney, and I suspect we'll see some of this in front of the Supreme Court, or at least Court of Appeals somewhere in the country, in the near future. What the outcome will be is anyone's guess, but this will be interesting for sure.
