Investors who plan ahead and implement some basic strategies during periods of economic abundance have a better chance of their rental properties surviving even a prolonged recession.
The world of real estate investing is exciting but incredibly unpredictable. You might be riding the high of favorable returns one day only to stare down a looming recession the next. Fortunately, there are many ways to protect your investment when the financial picture is not so rosy.
Sometimes the best you can hope for during a recession is to maintain your position. This means focusing on cutting costs, keeping current tenants happy, and being flexible so you can reduce vacancy rates. If you have capital to spend, picking up other rental properties during a recession can be a good bet. But if your investment goals include long-term, steady growth, continue to focus on stabilizing your current portfolio.
Here are 12 ways to adapt your rental property during a recession.
1. Lower Your Rates
It may be counterintuitive to collect less money during a recession, but consider this: If you are feeling the pinch of a market downturn, so are your tenants. They may be inclined to shift to a lower-priced rental during this time to save money. Reducing your rental rates, even for an introductory term, makes your rental property more attractive to tenants. Even so, it’s still important to ensure your rental rates continue to cover expenses.
2. Be Flexible
If your current tenants are struggling to make payments, consider flexible payment plans to ease the pinch. Allow partial payments for a period of months or provide a discount for early or multi-month payments.
3. Reduce Expenses
When a recession is on the horizon, put off optional upgrades and improvements. Focus on what’s absolutely necessary. If you haven’t already, take a look at your monthly expenses for the past three months and determine what costs you can reduce or eliminate. Then bank that cash for emergencies.
4. Go Short
Potential tenants may hesitate to sign long-term leases when they aren’t sure of their financial future. Offer short- or medium-term leases with the potential to convert to a longer lease to appeal to these tenants.
5. Go Long
On the other hand, consider offering longer leases with more favorable terms. You might reduce the rent for the first six months, returning it to a market rate over a two-year period.
6. Level Up Marketing
It’s time to shout the benefits of your rental property from the rooftops. Focus on any features that add value, especially during a recession. These features might include easy public transportation, proximity to grocery stores and shopping, or amenities such as an in-house gym. Don’t forget to highlight price adjustments or flexible rental periods too.
7. Mind Your Vacancy Rate
Keep an eye on the bottom line: your vacancy rate. Be proactive in your search for new tenants and be responsive to the needs of existing ones. One strategy for keeping vacancy rates low, especially in a university town, is planning rental periods so they do not coincide with the end of the school year. If your leases end at graduation, chances are good you’ll be staring at three months of vacant units until students return.
8. Streamline What You Can
The administrative cost of rental properties can eat into your profits. Automate administrative tasks such as rent collection and responding to tenant complaints. Check in with suppliers to negotiate more favorable rates for long-term contracts and bulk purchases.
9. Keep Up Appearances
If you are cutting costs during a recession, it can be tempting to eliminate landscaping services or other property maintenance. Do not give in to this impulse. Regular maintenance prevents more costly repairs or purchases in the future. Keeping your property in top shape also attracts more prospective tenants.
10. Consider Other Rental Options
Diversifying your tenant base is another way to reduce vacancy rate and expand the use of your rental property. If your single-family rental isn’t moving, consider medium-term furnished rentals (or short-term, if you’re in a hot vacation market).
You might also rent one room at a time. This is a high-return strategy that might be just what you need to get through a recession, especially if your rental property is in an area with an abundance of individual tenants (i.e., a college town) or if you’re trying to attract people who are relocating and looking for temporary housing. Keep in mind that local laws may not permit single-room rentals. Check with your locality.
11. Invest Wisely
If you do have some cash to add a rental property, invest with the 1% rule in mind: Your monthly rental rate should be at least 1% of the purchase price. Finding a property that is ready to rent at a lower price and being able to afford to snap it up and rent it fast is a great way to safely boost your bottom line when the economy is in a downturn.
12. Expect the Worst
It may seem counterintuitive, but a good time to put your rental property to the stress test is when financial skies are blue. Assume one or all of the worst-case scenarios:
- Tenants don’t pay for 90 days.
- Vacancy rates triple.
- Property values plummet.
Could you survive each of these situations? Make changes before a recession hits so that you can weather any of these situations. A recession can be devastating for investors who aren’t prepared. Be proactive to protect yourself during the downtown and position yourself for a positive future.