With unemployment numbers skyrocketing, many investors in rental properties are concerned about the security of their investments. But a recession is actually an ideal time to invest in the rental market. This is often forgotten, since extenuating circumstances regarding financing caused the financial crisis of 2008 to impact real estate investors. Since the rules regarding financing have since been updated, this is one instance where history is unlikely to repeat itself.
Recessions and the Rental Market
A recession typically impacts the housing market, not the rental market. If owner occupants can’t afford their mortgages, they become renters – increasing the number of renters. Since housing is a necessity, vacancy rates see little impact from a recession. For example, in October of 2009 the unemployment rate reached its financial crisis peak of 10%. At that point, rental vacancies peaked at 8.43%. We can compare this to the fourth quarter of 2019, which saw the lowest unemployment rate since the 1960s, which had a vacancy rate of 6.4%.
This means the difference between the lowest unemployment rate in 50 years and the highest unemployment rate during the worst economic crisis since the great depression, only created a 2% change in vacancy rate. Even if renters do fail to pay rent, landlords can evict them. As long as the rental property is in decent shape, the increased demand caused by more renters means landlords should have little problem filling vacancies.
COVID-19 and the Rental Market
It is possible that tenants during a recession may have difficulty paying rent. While unemployment rates are currently high, the impact to the rental market remains minimal. This is in large part likely due to that fact that renters who have lost jobs have access to unemployment insurance thanks to the CARES Act.
April of 2020 saw a small decline in national rent payments, but nothing like the massive drop that many had anticipated. According to NMHC, 91.5% of rent was collected by the week of April 26th. This is only a four percent decline from the same period in April of 2019. Rent collection for the first week of May has outperformed rent collection from the first week of April. By May 6th, over 80% of rent payments had been collected, which is 2% higher than had been collected by April 6th.
Why 2008 Was Different
We’ve seen how, typically, recessions hit owner occupants harder than investors, but this wasn’t the case in 2008. During the financial crisis of 2008, real estate speculators were impacted more than owner occupants. This is because the barrier of entry to real estate investing became incredibly low. Regardless of your income or credit score you could often purchase rental properties. This may lead you to wonder, if it happened then, how do we know it won’t happen again? The answer is simple, the rules around financing have changed drastically.
Changes to Financing
In 2006, almost a third of housing loans were either subprime loans or they were low or no-documentation loans. The Dodd-Frank Act, passed in 2010, established the Consumer Financial Protection Bureau (CFPB). The CFPB requires mortgage lenders to provide consumers with clearer terms and language, lowers commission rates, and discourages lenders from providing mortgages that consumers cannot afford. While these regulations will ensure that what happened to the housing market in 2008 cannot happen again, the changes are not without their consequences. The biggest impact is that it’ll be considerably more difficult for real estate investors to receive financing. Financing has become even more difficult due to COVID-19, and some banks are canceling loans.
Based on the numbers we’re currently seeing, those already invested in real estate may see little to no difference in rent collection. They may even see an increase in demand for rental properties. The potential problems may arise for those either interested or already in the process of purchasing new rental properties, since financing may prove difficult in the current environment.