I have been asked this question many times: What happens if I buy a rental property now, and then after some amount of time the market drops and real estate values plummet?
It’s a common question, and a valid question. I get it from family, people that are interested in learning more, as well my own capital investors. My answer is always “I hope that I have a lot of cash available at that time!” That answer is usually met with wide-eyed concern and bewilderment.
As a long term, buy and hold investor for cash flow, I am not concerned if the market drops. I buy property at a point where it cash flows well. I receive the rent, pay the expenses, pay the mortgage, and profit a certain amount every month. If it’s value drops is doesn’t matter! I’ll still be able to pay the mortgage and make the same cash flow every month. And a great deal towards the top of the market is still going to be an OK deal with a correction.
WHEN IT DOES MATTER
There is only one time that matters to me if the values drop after I’ve purchased a property. It only matters if I plan to refinance it or sell it. Other than that, I just keep making the same monthly cash flow I had been. It is very rare for residential rental rates to drop significantly, which would be the only concern. In a very inflated area or hot market this could happen. Or if an area lost it’s main employers that would significantly affect rental rates too as happened in Detroit during the great recession.
However, in many areas the rental market strengthens when real estate values are trending downward. In those times a lot of would be buyers become too apprehensive about the market. Many people decide to rent for a while longer before buying. Banks also become more stringent about who they lend to when the market is heading down. Combining more stringent lending regulations and less buyers means more renters. Therefore the demand for rental units is often higher when market values are dropping.
The market values are of huge concern to people that are buying for appreciation or speculating. They purchase their properties banking on it being worth a significantly higher amount in the future. If the market doesn’t do what they are expecting, they could lose everything. This is one of the reasons why I just invest for current cash flow. The market can be unpredictable. I wouldn’t risk everything betting on the future value.
WHY I WOULD WANT LOTS OF CASH WHEN THE MARKET TURNS DOWN
The reason my answer is that I hope I have a lot cash if the market drops is so I can buy as much rental property as possible at the lowest rates. I started my investment career in mid 2010, not that long after the housing crash of 2008, but long enough after that the market was rebounding a little bit. By the time I was ready to buy a second a property the market values had continued to increase. Before I knew it, there were hardly any deals to be had at a price I would pay.
Today it is even harder to find a good deal. The problem is the sales prices have continued to climb up and up at a far higher rate than the rental prices have risen. It costs much more to purchase the same amount of rental revenue now than it had when the market was down. I wish I had a lot of cash available when I first started out. The returns that could have been made were absolutely incredible and the market was overflowing with great deals. Today I have to be much more patient and just wait to pounce as soon as good deal hits the market.
If you are a cash flow real estate investor, don’t be worried about future values dropping. Just hope you are in a position to take advantage of the deals that can be had when values do drop!