Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Betty in Ohio: Hi Brian, I got started a little late following the 2008 recession but I did make my first rental investment in 2012 and it has done well for me. Today, it’s clear to me and probably almost everyone else that we are already in another recession. I bought and still own three rentals from 2012 and 2013. I keep an eye on the rental market but not at a detailed level. Nor am I an economist that can make sense of this recession caused by the pandemic. I want to buy another rental and I want to do it earlier in the recession this time. What should I be looking for and considering the most?
Answer: Hi Betty. Historically, recessions are very good, if not the best, time to make rental investments because rentals are less volatile than the stock market and there is less competition from other buyers (especially fewer retail buyers). The number one risk that you should consider is if the property you are considering has positive cash flow. The second important concern is if the property will appreciate in value quickly once the recession is over. Those are always basic rental investment considerations but riskier during a recession.
This pandemic driven recession comes with some unprecedented unknowns. Unemployment is skyrocketing much higher than the recession of 2008. But this is even a bigger unknown because the economy was relatively strong before the pandemic. A few more weeks will likely reveal if people can successfully return to work in large numbers. Betty, if you’re looking at occupied rentals, the current tenants might even be behind with the rent. Patience with struggling renters is a virtue right now but careful scrutiny of the cash flow is the prudent thing to do. Even if the economy turns around quickly, people are going to need time to recover financially. It’s probably not wise thinking you’ll be able to quickly increase cash flow by raising the rent. Rents are likely to be stagnant for the next six months or longer.
With that said, some other basics apply to rental investments as the pandemic continues. The place to start looking is at what was occurring before the pandemic regarding job growth, population growth, and affordability. Economies likely to come back the fastest are technology, health care, and biotech, with a strong possibility that military and higher education based economies will also rebound quickly. At the same time, be afraid of economies that were struggling before the shutdown like oil-based economies. Betty, you’re in Ohio where it isn’t as dependent on oil as much as North Dakota, Oklahoma, and possibly Pennsylvania and Texas. You might also want to stay away from economies that are especially struggling with COVID-19 outbreaks. These are likely to take longer to recover as well as have more outbreaks over the next several months and into the winter.
On the other hand, places geared towards distributing products were growing before the pandemic and have not been as heavily affected. These would be places where Amazon has warehouses or Memphis where FedEx has central operations. There are also places with some uncertainty that also have high potential. Places like Detroit where housing is very affordable, the economy was steadily improving, and there was a high demand for rentals. However, the Detroit economy is heavily dependent on automobile sales that can be expected to suffer during the recession. There are undeniable risk and uncertainty but when others are afraid, prices become competitive and there could very well be a pay off in the future. The auto industry has a history of being on the receiving end of massive government bailouts.
Betty, if you want low risk, you should consider section 8 housing as rentals. Even during times of eviction moratoriums, the government portion of the rent is still being paid. For some tenants, the full rent is paid through section 8. The flip-side to this one is that some people are looking to “shelter in place” in a nice rental home with a backyard for the kids and pets. In these still early days of the pandemic, there is some evidence that larger houses are becoming preferred but the trend is mostly with owner-occupied homes.
I think there is a lot of hope that because the economy was strong before the pandemic, that it will recover quickly. But the truth is no one can be sure. Anything that anyone is saying right now is nothing more than a prediction. Because this is so unprecedented, it’s an opportunity for creative investors to look outside the box. There are probably opportunities that most of us aren’t seeing yet.
Please share your out of the box thinking by leaving a comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].