Talk of a recession can bring increased anxiety. As a landlord, you probably have two major concerns. First, you may be worried about the loss of income should your tenants lose their job and be unable to pay their rent. Second, you might be worried about having empty rental units for an extended period, creating a negative cash flow situation. But, there are things you can do to decrease your anxiety and prepare for the future.
While the 2008 recession has faded, there is an important lesson to remember. Real estate investors will tell you that people who were forced to sell for survival were financially hurt, but those that could stay in a holding pattern were able to weather the storm of property value fluctuations and income variability. With that in mind, a little planning and strategy can help you make it through another recession.
Ask Yourself These Questions
As you think about setting yourself up in the best position to weather a recession, consider these questions.
- Is your interest rate fixed on your properties? Rising interest rates are a quick way to tap into reserves you had earmarked for something else as you work to cover your mortgage. Fixed interest rates can save you a lot of money as the interest rates rise.
- Are you competitively priced in the market? If you rent at the top end of the market, you may find more instability in maintaining occupancy.
- How much is your monthly cash flow? Know your numbers. Consider your mortgage, taxes, forecasted repairs and upgrades, and tally up those numbers. Calculate the rental payments coming in each month. Having a firm grasp on the money coming in and going out of your business will allow you to make decisions for the long term.
- Do you have reserves? Experts recommend that landlords have six months of operating expenses on hand per property. For example, if your operating expense on a property is $1,000/month, you should have $6,000 in reserve. This total amount should increase with each property. You’ve already crunched the numbers for your cash flow, so use that data to make your reserve plan.
Consider Your Tenants
A recession hits hard because it not only affects businesses but also affects people. And your tenants will personally feel the effects too. Finding and retaining stable tenants becomes even more important in this situation. A renter causing property damage that leads to major repairs can force you to tap into your reserves long before you’re prepared to. Tenants who get laid off may stop paying rent, and it may become difficult to evict them if moratoriums return.
While you may have good cash flow right now, residents may find that they have more options as landlords begin lowering rental rates and your competition increases. Take some time to consider how you can boost satisfaction and guarantee they’ll stick around.
- Keep well-maintained public spaces.
- Offer convenience services like easy access to housekeeping or dog walking that provide value for the tenant’s time. Negotiating a group rate will help your tenants and could be a welcome offer for another small business trying to survive.
- Survey your property to ensure it utilizes the cost-efficient resources available. Higher grade windows and energy-saving appliances are valuable to both the tenant and yourself, with monthly cost savings on utilities.
Long Term Lease Agreements
The best way to recession-proof your property is to ensure that it provides a steady and consistent income stream. This is where the long-term lease agreement comes in. As you prepare for a recession, it may be wise to negotiate a long-term agreement with your tenant in exchange for a slightly lower rental rate. This may mean lowered income, but it comes with the assurance of a secure cash flow in an environment of financial instability.
Wait it Out
Loss of property value is an unfortunate consequence of a recession but it can be waited out. Don’t try to sell properties. Unless you’re in dire straits, you’re not going to get a great return on the property’s value. The housing market is cyclical and recessions eventually end. If you have a stable tenant and steady income, you can recoup the property value over time.
A recession typically hits the housing market harder than the rental property market. If people can’t afford to buy a home, they will look to rent instead. Most cities in the United States never experienced more than a 5% drop in average home value since 1996. Yet, during this time, rent prices went up nearly 20%. Depending on where you are, your rental home could become even more valuable during a recession.
Think Outside the Box
Do you have a struggling property? Is it in an interesting, unique, or touristy area? Consider listing your property as a short-term rental/vacation option. While economic activity slows down during a recession, interestingly, tourism does not get impacted that severely. During the 2008 recession, the demand for hotels did not significantly decrease. With the introduction of vacation rental companies like Airbnb, VRBO, and others, listing your rentals on these sites targets business travelers, international visitors, and local tourists.
In addition, because of two years of covid shutdowns, there is a pent-up desire for travel that forecasters do not anticipate will plunge even with the recession indicators. The vacation home market is particularly popular as people work to reconnect with family and friends in large group vacation settings.
The market for vacation homes has grown by nearly five times since 1999. If you have an empty rental or unstable situation, converting to a vacation rental may be a way to help recession-proof your investment. To calculate the potential income from this type of property, you can try a calculator like this.
Partner With the Experts
Owning rental properties is never risk-free. However, even during recessions and other unstable market situations, there are ways to increase your odds of long-term survival and success. It’s worth your time to survey your properties and plan ahead for the market fluctuations that are sure to come.
Of course, facing instability can take its toll. That’s why having an expert who will help you navigate the complexities surrounding rental properties can lessen your stress levels and increase the value of your properties. Call or text Darla Andrew today at 503.515.3170 to learn more about how we provide the support you need to confidently enjoy the rental process.