Can Rental Properties Withstand the Recession?
Explore how rental properties may perform during a recession, including tenant demand, rental income, vacancies, property values, and investment risks.
Economic downturns are challenging for all investments; however, historically, rental real estate has proven resilient.
As an investor in rental property, you should be aware of how your portfolio will perform during an economic downturn and what specific actions you can take to help ensure continued rent revenue if the economy tightens.
This guide provides an overview of the historical evidence showing that rental markets tend to remain stable during economic downturns, explains why rental values may continue to stabilize even as housing values decline, and more.
Can Rental Properties Withstand the Recession?
Yes, history has shown that rental real estate is generally among the most stable assets during recessions. Historical trends show that home prices go down during a recession, and rental market trends tend to remain more resilient. As such, rents will occasionally decrease slightly, but they don't usually plummet as quickly as home prices do.
The demand for renting will likely be strong enough to keep the rental market level with the number of would-be buyers who decide not to buy now. Additionally, the consistent cash flow generated by rental properties will serve as a defensive investment during difficult economic times compared to many other types of investments.
Why Rentals Hold Up Well
1. Housing Demand Remains Constant
Regardless of how the economy performs, you provide an essential service — a place to live. Just as people may cut back on their vacation plans or eating at restaurants, no one cuts back on their living expenses.
This essential need leads to relatively low vacancy rates, especially in locations with high-quality rental inventory. This helps provide the financial foundation for your income to remain stable throughout all phases of the economic cycle, even during periods when other areas experience difficulty.
2. Homebuying Pauses, Renting Rises
As unemployment becomes uncertain and access to financing grows tighter, many individuals defer buying a home. These delayed decisions expand the available rental population. In turn, this expanding population provides greater support for both occupancy levels and rent stabilization within the area. Thus, as the overall housing market slows due to a lack of willing buyers and declining sales values, your rental property will likely remain full.
3. Rents Stay More Stable Than Sale Prices
History has also shown that while home sale prices tend to decline during economic downturns, rental prices do not decline to the same extent. Although the overall value of your home may decline significantly, the amount you collect each month in rent tends to remain much more stable. Consequently, your rental income is generally protected from the fluctuations experienced in the sale of your home.
4. Tenant Retention Naturally Improves
During economically stressful times, tenants tend to extend their tenancies naturally. By doing so, they reduce what can be expensive turnovers. Fewer vacancies means less money spent on advertising, painting, etc., and fewer lost dollars between leases. The increased rate of renewal activity enhances your ability to maintain predictable cash flows during the worst of economic conditions.
5. Data-Driven Management Protects You
Consult with a local Northern Virginia property management company to provide valuable data on regional tenant stability. This data can help you set competitive rental prices, screen potential applicants most likely to be responsible, and make informed decisions when you need to take steps to protect your investment during economic downturns.
3 Ways Investors Can Protect Their Investment
Economic storms give prepared investors a competitive advantage. Rather than react with fear, you can do three things today to protect your rental income and put yourself in a strong position for the future.
Build a Robust Cash Reserve
Create a dedicated fund by setting aside six months of operating expenses per property. These emergency funds cover mortgage payments, insurance premiums, and essential repairs without panic. Having emergency funds available means a short gap in rent becomes a minor inconvenience rather than an existential crisis.
Prioritize Thorough Tenant Screening
Tenants who pay their rent reliably are your biggest asset as you weather the economic cycle. Make sure your tenant screening is as thorough as possible. Verify the potential tenant's employment history, income records, and references from previous landlords.
A little more time before placing a new tenant in a vacancy is worth far more than risking a tenant who does not make timely rent payments. Once you’ve properly screened them, you can be confident that whenever they make adjustments, like implementing new living room color ideas, they will respect your property.
Partner with a Local Property Management Expert
Local knowledge gives you a better understanding of what is happening in the local rental marketplace, including how stable your current tenants are, whether rents need to be adjusted, if there are any changes taking place in local government regulations that may affect your ability to rent out your properties, and how quickly you should fill any vacancy that occurs.
Conclusion
Rentals demonstrate the ability to withstand economic downturns. The same assets that may decline in value during an economic recession can provide stable income through rental properties. Building up a cash reserve before entering the business of renting residential units, carefully selecting tenant candidates, and using professional assistance to manage rental units from a local perspective allows one to be prepared to withstand or benefit from economic fluctuations.
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