Rental Property Management in a Market Crash

Copyright 2023 by Jeff Rohde/Basic Property Management

All rights reserved

www.BasicPropertyManagement.com

Disclaimer

All of the information in this book is presented for informational purposes only and does not constitute investment advice.

Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do you own due diligence before making investment decisions. Certified professionals can provide individualized investment advice tailored to your unique situation. This book is for general investment information only, is not individualized, and as such does not constitute investment advice.

Every effort is made to ensure that the content is accurate, but accuracy cannot be guaranteed and all information is presented as is. Investors should consult multiple sources of information when analyzing investments.

Investments may lose value. Investors should use proper diversification and maintain appropriate sizes when managing their investments.

About the Author

Jeff Rohde is a seasoned real estate professional and author, who leverages his extensive experience in business and property investment to educate others through compelling writing and one-on-one training and mentoring.

My journey to where I am today has been an interesting one. It began when I put myself through university working nights while studying during the day. This experience taught me the value of hard work and the importance of tenacity.

After receiving my degree in journalism and business, with continued MBA studies, I held executive positions with communications companies in Phoenix, Denver, and Chicago. It was during this time that I honed my leadership skills and developed a keen understanding of the business world.

I've always had an entrepreneurial spirit, which led me to found a retail business with multiple locations. After several years of successful operation, I sold it for five times the original investment. This was my first taste of the power of strategic investment, and it left a lasting impression.

My career took a turn when I began working in business brokerage, eventually shifting to residential investment and commercial real estate to better match my skill set. I founded my own real estate brokerage specializing in residential and commercial real estate leasing, brokerage, and property management.

I witnessed the Global Financial Crash firsthand, seizing real estate investment opportunities for myself and my clients as they became available. Guiding client investment through the bottom of the crash to the market peak to help maximize return on investment was a challenging but rewarding experience.

Always looking to stay ahead of the curve, I began investing in Bitcoin and cryptocurrencies early on to better understand the opportunities for real estate tokenization and investment.

With my personal investments now on autopilot, I devote my efforts to writing about real estate, education, and providing one-on-one training. My work quickly attracted attention from corporate clients like Crexi, Lendai, Obie, Roofstock, and Stessa for content creation.

In addition, I've authored several books sold by major distributors and operate websites to help investors thrive throughout all parts of the real estate market cycle. I'm passionate about sharing my knowledge and experience to help others navigate the complex world of real estate investing.

To learn more about real estate investing, property management, and my one-on-one mentoring and consulting services visit https://basicpropertymanagement.com/

Introduction

While history doesn't always repeat itself, it often rhymes. Looking at the current events, there are some parallels being drawn with the lead-up to the Global Financial Crisis (GFC) of 2007-09.

One of the striking similarities is the impact both crises have had on the global economy. The GFC led to a severe recession, and today, we are witnessing economic disruption on a similar, if not larger scale. This disruption has created uncertainty, a key factor shared by both crises once they emerged.

Notably, the financial crisis began within the housing sector, marked by inflated property prices and easy credit conditions. Comparatively, today's real estate market has been experiencing a significant surge in home prices, fueled in part by low interest rates and limited supply, causing some economists to worry about the possibility of another bubble.

Another similarity is the role of monetary policies. During the GFC, central banks worldwide took unprecedented steps to stabilize the economy. Today, in response to the pandemic, central banks have again resorted to extraordinary measures, such as slashing interest rates and buying up assets, potentially setting the stage for future economic instability.

When we talk about the Global Financial Crisis, it's impossible to overlook its profound impact on the real estate market in the US. The collapse of the housing market triggered a chain reaction that rippled through the global economy. Millions of people lost their jobs as businesses struggled to stay afloat. The housing market crash of 2008 was a stark reminder of how interconnected the global economy is and how quickly things can change.

The GFC began with a boom in the housing market. Easy credit conditions led to increased borrowing, allowing many people to buy homes they couldn't afford. This resulted in a housing bubble, where house prices were inflated far beyond their true value. However, like all bubbles, this one eventually burst. When the bubble popped, millions of homeowners found themselves underwater, owing more on their mortgages than their homes were worth.

When homeowners faced foreclosure, their reactions varied widely. Some tried to fight the process, engaging in legal battles to keep their homes. Others, overwhelmed by the situation, simply walked away. In extreme cases, homeowners stripped their homes of valuable materials, such as copper wiring and appliances, either to sell for cash or out of spite towards the lenders who were taking their homes.

Foreclosures also led to numerous abandoned pets. Unable to afford their care or find housing that would accommodate them, many homeowners left their pets behind when they moved out. Animal shelters reported a significant increase in the number of abandoned pets during the height of the foreclosure crisis.

The emotional toll of foreclosure was equally severe. Many homeowners reported feelings of shame, embarrassment, and helplessness. It was not uncommon for people to hide their situation from friends and family, further isolating themselves during an already difficult time.

In some cases, foreclosed properties were left vacant for months or even years, becoming symbols of the financial crisis and contributing to neighborhood blight. These zombie homes could attract crime, lower property values, and create safety hazards.

However, the market eventually began to recover. By 2012, home prices started to rise again, and by 2016, the national median home price had returned to its pre-recession levels. The recovery wasn't uniform across the country—some areas recovered faster than others—but overall, the trend was positive.

The GFC highlighted the importance of sound investment strategies and the need for caution when market conditions seem too good to be true. In the years since the crash, many investors have adopted more conservative approaches, focusing on long-term stability over short-term gains.

Whether you're a seasoned real estate investor or just starting, understanding the impact of the GFC on the US housing market is crucial. It provides valuable insights into the dynamics of the market during a downturn and underscores the importance of being prepared for all eventualities. By learning from the past, you can make more informed decisions and build a more resilient investment portfolio.

In this book we'll dive deeper into strategies for investing in and managing rental properties during a recession, drawing on lessons learned from the GFC. We'll explore how to navigate market downturns, protect your investments, and position yourself for success when the market rebounds.

Chapter1 : Basics of Rental Property Investment During a Market Crash: An Overview

In the exciting world of real estate investing, you've likely experienced the rush of purchasing a property at a great price, renovating it to perfection, and then reaping the rewards as your tenants' rent checks roll in. I know that I did during the Global Financial Crisis (GFC) of 2007 – 2009.

But what happens when the market takes a nosedive? Suddenly, those reliable rent payments might start shrinking or even disappearing, and the value of your property plummets. In these uncertain times, understanding the basics of rental property investment during a market crash becomes an essential skill for every investor.

In this chapter I’ll set the stage by providing a mile-high view of every step of the journey, from assessing the pros and cons of investment during a downturn, navigating financial hurdles, to managing your investment successfully amidst market chaos. In future chapters I’ll dig deeper into each concept, so feel free to skip ahead if you already have a good deal of experience under your belt.

Introduction to Rental Property Investment

Let’s start with a basic definition. Rental property investment refers to the practice of purchasing real estate properties, such as houses or apartments or vacation rentals, with the intent of renting them out to tenants. The goal is to generate a steady stream of income from the rental payments. Ideally with income exceeding the costs associated with owning and maintaining the property, and turning a profit with monthly net cash flow and appreciation in property value over the long term.

Rental Property Investment in Good and Bad Times

In Prosperous Times

During prosperous times, rental property investment can be a money-making venture. Properties tend to appreciate in value over time, and high demand for rental spaces can lead to increasing rent prices, cash flow, and net income. This scenario allows investors to enjoy a good and relatively predictable return on their investments.

In Market Downturns

However, during market downturns, the situation can become more complex. Property values may decrease, and tenants might struggle to meet their rental obligations, leading to lower or interrupted income streams for investors. Despite these challenges, investing in rental properties during a market downturn can still present opportunities, provided investors adopt a strategic approach, generally with a long-term horizon.

Understanding the Impact of Market Conditions on Rental Property Investment

Market conditions significantly influence the profitability of rental property investments. In a robust market, high employment rates and economic stability often mean more people are looking for rental properties, driving up demand and rental prices. Conversely, during a market downturn or recession, job losses and economic instability may decrease demand for higher-priced ‘Class A’ rentals with demand increasing for more affordable places to live. Owning the wrong property in the wrong place at the wrong time can potentially lead to lengthy vacancies and reduced rental income.

Why Invest in Rental Property During a Market Crash?

While a market crash might seem like the worst time to invest in rental properties, it can actually present unique opportunities. Property prices often drop during a downturn, allowing investors to purchase properties at lower than usual prices. During the GFC I remember seeing homes listed for as low as $30 per square foot. While prices like these were dirt cheap, often times the previous owners had stripped out of the home everything they could carry – appliances, plumbing and electrical fixtures, HVAC units, copper piping and wiring, and more.

Additionally, during these periods, many people may opt to rent rather than buy homes due to financial uncertainty, potentially increasing demand for rental properties. However, investing during a crash requires careful planning and risk assessment. It's crucial to have a deep understanding of the market conditions and to prepare for potential challenges such as reduced or delayed rent payments or having extra cash on hand to make the home habitable.

Advantages of Rental Property Investment During a Market Crash

Lower Property Prices Leading to Higher Potential Returns

One of the most significant advantages of investing in rental properties during a market crash is the opportunity to buy properties at lower prices. When the market crashes, property values tend to drop, sometimes significantly. This decline presents a golden opportunity for savvy investors to scoop up properties at bargain prices.

Let's consider a hypothetical scenario: In a booming market, you might purchase a rental property for $300,000. However, during a market crash, that same property might be available for only $200,000. If you're able to secure a tenant paying $1,500 per month, your annual return on investment in the first scenario would be about 6%, whereas in the second scenario, it would be around 9%. That's a substantial difference!

Increased Demand for Rental Properties

During a market downturn, many people may prefer to rent rather than buy homes due to financial uncertainty and instability. People may be less willing to commit to a mortgage when job security is uncertain, or they may simply not have enough funds for a down payment on a house. As a result, the demand for rental properties can increase, providing investors with a larger pool of potential tenants.

Potential for Long-Term Capital Appreciation

While property values usually decline during a market crash, history shows that over the long term, real estate tends to appreciate in value. The St. Louis Federal Reserve publishes a chart titled Median Sales Price of Houses Sold for the United States that you can review at https://fred.stlouisfed.org/series/MSPUS. Therefore, if you're able to purchase a rental property at a reduced price during a downturn, you stand to benefit from capital appreciation once the market recovers, as historically it always does.

To illustrate, suppose you purchase a property for $200,000 during a market crash. Over time, as the market recovers and property values increase, that property could potentially be worth $250,000, $300,000, or more. This increase in value is the capital appreciation, which would be a significant boost to your overall return on investment when added to any recurring positive cash flow from tenant rent payments when you decide to sell the property.

Disadvantages of Rental Property Investment During a Market Crash

While there are certainly advantages to investing in rental properties during a market crash, it's essential to also understand the potential drawbacks. Market downturns present unique challenges that require careful consideration and strategic planning. It’s important to understand that investing in real estate when the market crashes may not be the best strategy for investors who are risk-adverse or lack access to capital.

Risks and Challenges Associated with Recessions and Market Downturns

As I’ve just said, investing during a market downturn isn't for the faint-hearted. Here are some of the risks and challenges you might encounter:

Increased vacancies: Tenants may be unable to afford rent due to job loss or financial difficulties, leading to increased vacancies.

Difficulty finding tenants: Although demand for rentals can increase during a downturn, finding reliable tenants might be more challenging.

Depreciation in property value: While property values tend to recover in the long run, they can depreciate in the short term, which could be problematic if you need to sell the property quickly.

Potential for Decreased Rental Rates

In addition to the above challenges, a market crash might lead to decreased rental rates. If many people are struggling financially, they may not be able to afford high rents. This situation could force you to lower your rental prices to attract and retain tenants, which could impact your return on investment (ROI).

Difficulty in Financing and Maintaining Cash Flow

Obtaining financing for rental properties can be more difficult during a market crash. Lenders often tighten their lending criteria during these times, making it harder if not impossible to get a loan at a reasonable interest rate. This means that maintaining a positive cash flow can be challenging if not impossible.

Let's say you purchased a property for $200,000 with a monthly mortgage payment of $1,000. You anticipated renting it out for $1,500 per month, giving you a positive cash flow of $500. However, due to the economic downturn, you can only rent it for $1,200. After paying your mortgage, you're left with a cash flow of just $200, which might not be enough to cover emergency maintenance and other property-related expenses.

Analyzing the Rental Property Market During a Market Crash

Understanding the dynamics of the rental property market during a market crash is crucial for making informed investment decisions. This process involves analyzing market indicators and trends, considering the location and local economic conditions, and carefully evaluating potential rental income and property values.

Understanding Market Indicators and Trends

Here are some key trends to watch:

Vacancy rates: High vacancy rates might indicate an oversupply of properties or a decrease in demand due to economic conditions.

Rental price trends: Are rental prices increasing, decreasing, or remaining stable? This trend can provide insight into the demand for rental properties.

Property value trends: Monitoring how property values are changing can help you identify potential investment opportunities.

Local unemployment rates: High unemployment can affect tenants' ability to pay rent, while low unemployment might indicate a healthy local economy and strong demand for rentals.

Demographic trends: Changes in population size, age distribution, and other demographic factors can influence demand for rental properties.

Importance of Location and Local Economic Conditions

The location of your rental property and the local economic conditions can significantly impact its profitability.

For instance, properties in thriving areas with strong job markets are likely to have high demand and rental rates. However, these areas might also have high property prices, which could affect your return on investment.

On the other hand, properties in areas with poor economic conditions or declining populations might have lower property prices but also lower demand for rentals. For example, a town experiencing a significant industry closure or an inept government may see an exodus of people, leading to high vacancy rates and low rents.

Evaluating Potential Rental Income and Property Values

When considering a rental property investment during a market crash, it's vital to carefully evaluate potential rental income and property values.

Let's say you're considering a property that's currently priced at $200,000, and comparable properties in the area rent for about $1,500 per month. Your annual rental income would be $18,000, providing a gross yield of 9% before expenses.

However, if the market crash leads to a drop in rental rates, and you can only charge $1,200 per month, your annual rental income would be $14,400, and your gross yield would decrease to 7.2%. This calculation doesn't account for expenses like maintenance, insurance, and property taxes, which could further reduce your net yield.

How to Finance Your Rental Property Investment During a Market Crash

Financing rental property investments during a market crash can be a complex process. Traditional financing options may become more restrictive, pushing investors to think creatively.

Traditional Financing Options and Their Challenges During a Recession

Typically, investors turn to traditional financing options like bank loans, credit unions, or mortgage companies for funding. However, during a market crash, these sources may tighten their lending criteria due to the increased risk of defaults. Lenders might require higher credit scores, lower debt-to-income ratios, and larger down payments. This can make it more challenging for investors to secure the necessary funds.

Creative Financing Strategies for Market Downturns

In light of these challenges, investors may need to explore creative financing strategies. One such strategy is buying properties outright with cash and then conducting a cash-out refinance later when lending conditions eventually improve.

For example, let's say you purchase a property for $200,000 in cash during a market crash. Once the market stabilizes, you could potentially refinance the property for its new, higher value, pulling out the majority of your initial cash investment while still maintaining ownership of the property. This strategy allows you to free up cash that can be used for additional investments.

Other creative financing options could include seller financing, where the seller agrees to be paid in installments, or partnering with other investors to pool resources.

Importance of Maintaining Strong Cash Reserves

Regardless of your financing strategy, maintaining strong cash reserves is crucial during a market downturn. These reserves can cover unexpected costs, vacancies, or drops in rental income.

Best practices for cash reserves include:

Setting aside a specific percentage of your rental income each month.

Having a separate savings account dedicated solely to your rental properties.

Budgeting for regular maintenance and potential emergency repairs.

Strategies for Successful Rental Property Management During a Market Crash

Navigating the turbulent waters of a market crash can be challenging (to say the least), but with careful planning and strategic decision-making, you can successfully manage your rental property during these uncertain times.

Navigating Tenant Issues During a Recession

During a recession, tenant issues can become more complex due to economic hardship or a change in personal situation. Renters might demand more service even though they are paying less in rent. Here are five potential tenant issues to watch for:

Delayed or missed payments: Job losses or financial difficulties might cause tenants to delay or miss rent payments.

Increased vacancies: As people tighten their budgets, they may decide to move in with family or find cheaper accommodations, leading to increased vacancies.

Maintenance requests: With tenants spending more time at home, there may be an increase in wear and tear on your property and consequently, more maintenance requests.

Lease renewals: Tenants might be hesitant to commit to long-term leases due to uncertain economic conditions.

Tenant disputes: Financial stress and increased time at home can lead to disputes between tenants in a multifamily property that need to be resolved.

Maintaining and Increasing Property Value