For the past decade, if you bought a house, you could count on its value growing each year. If you owned a rental property, you could also count on the market value of the rent increasing each year. Thanks to the economy growing each year, you didn’t really have to know what you were doing to still see your investments rise.
Currently, I’m hearing a lot of worry from people who own rental properties. Then there are the people telling me that they had been on the path to buying their first rental property, but now they’re having thoughts. After all, both groups surmise, there’s going to be a recession, so it’ll probably be an uphill battle to break even. Unfortunately, these are wild oversimplifications based on only a little information.
People who entered real estate investing after 2011 haven’t had to whether a recession that depressed demand for rentals. Even during the lockdowns of 2020, home values continued to rise, and we all know how much rents skyrocketed in 2021.
The truth is, investors have gotten into the habit of expecting easy returns, and investing is not the same as expecting. Investing carries responsibilities and some element of risk. The good news is that if your strategy is a long-term buy and hold strategy, the risk is minimal.
We know this because of how rents performed during the Great Recession, which was the most severe economic downturn since the Great Depression. The Great Recession was devastating for millions of people. But what a lot of people may not realize is that when unemployment reached a high of ten percent in 2009, rents only decreased by an average of four percent. The following year, rent growth resumed at about two percent nationwide.
So even if we found ourselves in a repeat of that awful recession and you had to lower the rent on your property, is a four percent dip for one year enough to scrap an entire strategy for building wealth? A recession doesn’t change the fundamentals of real estate investing. You can still create passive income by investing in a rental property in an area with a high base of renters. Since 2000, rents have grown on average approximately four percent per year. Would you walk away from that? Bear in mind, a four percent reduction on a rent of $1500 would be $60.
Recessions are a part of investing. You can whether them by focusing on facts, not expecting the sky to fall.
