How Recession-Proof Is Your Rental Property?

Compared to other investments, rental properties and apartment complexes offer much better protection against recessions, but that doesn’t mean they’re 100% immune to them. Real estate property's value fluctuates yearly; however, some properties are more recession-resistant than others. 

If you want to learn how recession-proof your property is and how to enhance your protection, ExactEstate shares everything you need to know.  

What Is a House Market Recession?

Essentially, a recession is when the national gross domestic product (GDP) growth rate reaches a negative level for at least two consecutive quarters. In other words, a recession occurs when sales, revenue, and business activities decline. During these times, you’ll notice companies stop expanding, employers stop hiring, and the economy stops evolving. When these things happen, it can lead to a housing market recession.

When the recession impacts the real estate market, the focus shifts from the seller’s to the buyer’s market. This means there will be an increase in supply but a decrease in demand. Although property prices begin to soften, lenders become more stringent. It becomes all the more difficult for buyers to buy homes and sellers to sell. 

As the economy weakens during a housing market recession, home values will begin to collapse to the point where some homeowners will have difficulty paying their mortgages and securing their property. If the economy doesn’t improve, homeowners may need to foreclose on their properties.

How Does a Housing Recession Affect the Housing Market?

Housing recessions usually depress the prices of the real estate markets. The bad economic condition could result in fewer people being willing to buy homes with readily disposable income. As the demand decreases and home prices fall, real estate income can stagnate. 

However, look at the points below to give you a more in-depth idea of what can happen to the market when a housing recession occurs. 

Real Estate Prices Depreciate

Looking back at the Great Recession, the prices for homes or rental properties will likely decrease if a recession occurs now. But even if the prices may go down, there may be a significant disparity between home values and household income. 

Higher Demand for Rental Properties

Because potential homeowners may not have sufficient income to purchase a home right away, their next best option is to rent properties. Hence, the demand for rental properties will increase during a housing recession. The uncertainty will make people hesitate to commit to a property immediately, so they will opt for a more temporary solution, like renting a home or an apartment.

Rent Increases

As the economic principle goes, if there’s an increase in demand, supply will decrease. As demand for rental properties increases, the supply decreases. Sellers will opt to increase rental prices to control the influx of demand and capitalize on the buyer’s need to find a place to live. While this will negatively affect the purchasing power of potential buyers, it’s a natural consequence of a recession because sellers need to find ways to earn income.

What Real Estate Properties Are Most Recession-Resistant?

Due to the increasing demand for rental complexes, they’re considered one of the most recession-resistant properties to invest in. Besides the high demand, you will also enjoy continuous income flow. 

Another recession-resistant property in real estate is the apartment sector, particularly commercial multifamily real estate. These properties are expected to weather all types of recessions (including apartment recessions) because they not only offer a comfortable place to live but are an affordable housing option.

While rental properties and apartments are expected to do well despite a possible recession, single-family homes may not. The decrease in income may make it difficult for potential buyers to purchase a home. That’s why selling homes may be a challenge many people in real estate will face.

How Do You Recession-Proof Your Real Estate?

As a property owner, investor, or manager, the best thing you can do when a recession hits is to be prepared. You need a contingency plan that ensures your profitability despite the economic setbacks. To help you strategize for a possible recession, here are some tips you can follow:

Protect Your Portfolio

To protect your portfolio, you need to maximize your cash flow. This means that even if the values of properties may decline in the short term, you still need to have a strong cash flow that will help you weather any obstacle and economic downturn along the way.

To do this, you can increase the rent to match the market rate and find low-cost solutions to boost your revenue. For instance, you can install and offer coin-operated laundry machines or separate meter utilities. Doing so will ensure that you keep money coming in. 

Factor In Risk and Yield

Before a recession strikes, banks will often loosen their lending requirements and are more likely to extend credit at exceptionally low rates. However, once a housing recession hits, they may increase the loan-to-value ratio to 65% or 70%. That’s why, as an investor, you need to factor in possible risks and yields to identify the perfect time to loan funds. 

Make sure to maintain a low debt load and resist the temptation of investing in speculative deals that are of a higher-risk nature. 

Increase Your Liquidity

Real estate has innately low liquidity, making it hard to buy and sell quickly for cash. To increase your liquidity, a good strategy is to unload your underperforming assets. In doing so, you can have more cash on hand, which will make it much easier and more readily available to invest in times of recession, when real estate prices significantly go down.

Manage Your Property Today by Contacting ExactEstate

If you want to maintain your properties and ensure they continue to stay profitable amidst a recession. 

Experts like ExactEstate can help you manage your property digitally and provide simple solutions to even the most complex problems. Whether it’s managing payments, processing staff and residents, customizing workable systems, or creating detailed reports, ExactEstate is your one-stop solution for all your property concerns.

If you want to know how to grow your business, manage transactions, and overcome real estate challenges, set up a demo with ExactEstate today!