rental property recession-proof

Rental properties offer better protection against recessions than most investments. But that doesn’t make them completely recession-proof. 

As you look for ways to protect your portfolio from future recessions, here’s how rental properties have stacked up in past recessions.

 

Rents During Recessions

The good news for real estate investors is that rents don’t actually drop during recessions. People still need to live somewhere, regardless of how gross domestic product changes. 

In fact, recessions can even drive up demand for rental properties. Fewer people can afford to buy homes and become homeowners, after all.

Take a look at the Federal Reserve’s consumer price index for rents over the last 75 years:

In some cases, rents level off during recessions. Landlords have less pricing power to raise rents

But in other recessions, rents keep chugging upward undaunted. 

Regardless, rents don’t fall during recessions, removing the risk of collapsing rental cash flow

 

Property Values During Recessions

Home values, on the other hand, do sometimes dip when the economy falters. 

Here’s how median home values have fared since the early 1960s:

Even so, they only fell significantly once in the last 60 years: during the Great Recession. Which makes sense, given that it was largely caused by a housing bubble in the first place. 

Other recessions saw property prices decrease by around 5%. And in some recessions, home values didn’t drop at all. 

While real estate investors certainly can’t count on property values always going up, they’re far more stable than stocks, and rarely drop by more than 5%.

(article continues below)

Ditch Your Day Job: How to Retire Early with Rental Income (Free 8-Video Course)

Evictions & Vacancy Rates in Recessions

Where landlords get in trouble during recessions is with rent defaults, turnovers, evictions, and vacancies. 

A shrinking economy means fewer jobs, which in turn means more renters without work. If tenants lose their jobs, they often stop paying the rent, and landlords have to start the lengthy and expensive eviction process.

You can see this play out in rental vacancy rates jumping in recessions:

So while rents may not collapse during recessions, landlords can still see their cash flow stutter.

If you see a recession looming on the horizon, consider buying rent default insurance

Those vacancy rates aren’t just caused by rent defaults and evictions, either. Recessions cause many renters who previously lived alone to move in with family, friends, or roommates. This “household bundling” effect reduces demand for rentals and drives up rental vacancy rates. 

 

Case Study: Rentals in the Great Recession

The Great Recession ranks among the worst in America’s history, second only to the Great Depression. 

And given that it largely centered around overpriced real estate, it makes a great case study for a “worst-case scenario” for real estate investors.

Median home prices fell from a peak of $257,400 in the first quarter of 2007 to a trough of $208,400 in the first quarter of 2009. That represents a 19% drop in value, and in many cities, home prices fell by 30, 40, or even 50% or more. Keep in mind those are quarterly numbers, which round out the extremes.

Meanwhile, median US rents didn’t dip at all. They did flatten, however, in the aftermath and recovery from the Great Recession.

Rental vacancy rates did jump from 9.6% in the fourth quarter of 2007 to 11.1% in the third quarter of 2009. But that still only represents a bump of 1.5 percentage points — hardly a cause for panic. 

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Dangerous Precedent of Eviction Moratoriums

The coronavirus pandemic created a dangerous precedent in the form of eviction moratoriums. Tenant activists got a taste for making lease agreements only one-way enforceable, leaving tenants able to enforce their side but landlords unable to enforce theirs. 

When the next recession comes, it may prove “politically expedient” to pull the same stunt again. Landlords would again get strapped with non-paying tenants, forced to pay for someone else to live for free. 

It could happen on a nationwide level or it could happen at the state and local levels. While you can’t protect against a federal eviction moratorium, you can avoid investing in tenant-friendly states with anti-landlord laws

I certainly do — it’s one way I reduce risk in my real estate investments

 

Stocks During Recessions

Stocks don’t fare so well during recessions. 

Take a look at the jagged slopes of the S&P 500 in each recession for the last 90 years:

S&P 500 in recessions

Chart courtesy of Macrotrends.net

In the year leading up to a recession, the S&P 500 dropped an average of 3%. During recessions, it dropped another 1% on average. In the Great Recession, the S&P 500 dropped a dizzying 57% from peak to trough, of which 37% happened during the technical recession.

Here’s how the S&P 500 has performed before, during, and after each recession since the 1950s:

stock market during recessions

Chart courtesy of Darrow Wealth Management

The good news? Stocks nearly always boom in the aftermath of recessions, jumping an average of 16% in the year after recessions end. 

I don’t avoid stocks before, during, or after recessions. Quite the contrary: US stocks earn an average historical return of around 10.5%, and they make up a large portion of my portfolio. Don’t think in terms of whether to invest in real estate versus stocks, but rather how much of each you want in your investment portfolio.

Still, stocks are about as far from recession-proof as you can get. 

 

Are Rental Properties Recession-Proof?

No investment is 100% recession-proof. But rental properties perform better than most when the economy takes a nosedive. 

Rents don’t fall at all. Home prices do sometimes correct downward, and rental vacancy rates can tick upward. If property values dip, that can remove one of your exit strategies if it puts you upside-down on your rental property mortgage

When recessions hit, watch out for higher tenant turnover rates, rent default rates, and evictions. Buy rent default insurance to protect yourself against the risk of tenants not paying their rents. 

Rental property owners remain mostly unscathed during recessions. But stay vigilant about rent defaults, avoid turnovers if possible, and consider rent freezes or other incentives to keep good tenants in place while the economy finds its footing.

 

What have your experiences been with rental properties during recessions?

 

 

More Real Estate Investing Reads:

About the Author

G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.

Want to create passive income?

 

We’ll email a series of videos in our free course,

to help you start earning income from rentals.


Privacy Policy: Your info will never be shared or sold to a 3rd party. Even if Dr. Evil offers us 1 million dollars 🙂

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies

 

Ready to build passive income from small multifamily properties?

Over the next week, we'll email you a free series of videos, so enter your best email and let's get started!

You're in! Check your email to confirm, and you can email us directly at [email protected] with any questions :-)

Free Masterclass: 7 Ways to Protect Against Inflation

LIVE masterclass on Weds. 4/27 @ 2pm EST!

Your seat is reserved! Check your email to confirm.

Ready to Build Passive Income?

 

We'll email you the "recipe," plus a free mini-course on passive income over the next week, so enter your best email!

P.S. We never share your email, ever.

It's on! Check your email to confirm.

Ready to Build Passive Income?

Ready to Build Passive Income?

 

We'll email you the course videos over the next week, so enter your best email!

You're in! Check your email to confirm.

Ditch Your Day Job: Free 8-Video Course

 

Our brand new course on how to reach financial independence and retire early (FIRE) with rental properties is open for one week from Oct. 23-30!

You're in! Check your email for the link, or click here for the 1st video!

Share This