Should Landlords be Concerned about a Recession?

A recession occurs when economic activity declines significantly over a period of months or even years. Economic experts define recession as a period of declining income and manufacturing for an extended period of time, as well as negative gross domestic product (GDP), rising unemployment, and falling retail sales. Should landlords be concerned about a recession? An economy’s regular cadence of expansion and contraction is characterized by recessions, which are an unavoidable element of the business cycle.
Recessions are times when the economy struggles, people lose jobs, companies make fewer sales, and the country’s economic output declines. There are many factors that determine when an economy falls into a recession.

A recession caused by inflation would be less severe than one caused by credit excess, if history is any guide.
Apart from the pandemic-induced 2020 recession, other recent recessions have been credit-driven, including the Great Financial Crisis of 2007-2008 and the dot-com bust of 2000-2001. Housing and internet infrastructure were affected by debt-related excesses, and it took nearly a decade for the economy to recover.

A recession is more likely to occur today because of excess liquidity rather than debt. As a result of extreme fiscal and monetary stimulus related to COVID, money was pumped into households and investment markets, increasing inflation and fueling financial speculation.

 

A Federal Reserve tracker of economic growth is pointing to an increased chance that the U.S. economy has entered a recession.

When everyone is discussing the “r” word – recession – it might make homeowners nervous, especially if they’re undecided about moving in the near future. Because recessions are cyclical, we know a few things about what to do for buyers and sellers during one.

If selling your house might be an option for you and you have some flexibility over when, exactly, you want to move, here is some guidance about what to expect about selling a home during a recession.

Buyers benefit more from recessions than sellers do. There is a tendency for home prices to stagnate or even fall during a recession, and fewer people may have the financial resources to buy a home at all. The majority of buyers are tightening their belts, not looking to spend a lot of money on a house, and so there are few buyers who are ready to take immediate action.

Although you can still do a lot to make your home more appealing during a recession, the truth of the matter is that if you have any choice in the matter, a recession is not the best time for a sale.

So when should you sell your house? A house is most likely to sell at its best before a recession, so this can be tricky. During a recession, home values can drop, but they’re usually at their peak right before the recession hits, so if you can, sell high and buy low.

It’s hard to predict exactly when home prices will start turning more toward a buyer’s market versus a seller’s market – if it were easy, everybody would be investing in real estate aggressively. If you want to sell before a recession, feel free, but remember it can be a risky game with no guarantees.

Obviously, any seller thinks that their house is one of the best in the neighborhood, but if you’re realistic, you realize there are probably nicer homes and probably homes that are not quite as nice as yours. Do you know what buyers on your street and the streets around you are looking for?

Even though it seems obvious, it’s worth mentioning that homes that buyers don’t want quite as much are going to drop more in value than those that buyers want more. It could also indicate that buyers are prioritizing certain lot sizes or square footage in their home search, or that certain bedrooms or bathrooms are at a premium in your neighborhood.

What are the best ways to make your home more desirable in the current market? A good way to get a sense is looking at what homes receive multiple offers and even start a bidding war, versus what homes linger on the market like afterthoughts, and to talk to a local real estate agent.

When it comes to selling before a recession, some sellers think they can avoid sprucing up their house for a buyer at all, but in reality, the opposite is true. When you’re selling your home before a recession, you’re working within a window of time that might close tomorrow, and you don’t have time to get bogged down in inspections or appraisals.

Most sellers hire an inspector before listing their home so they can identify most of the possible issues and address them before buyers step foot inside. Sellers can use this strategy to demonstrate their motivation and seriousness before a recession, which will in turn attract qualified buyers to make offers on their lovely homes.

You don’t have time to experiment with a fantasy price that might appeal to some uneducated, but desperate buyers, if a recession is on the horizon, which means you really don’t have time to test the market. In a worst-case scenario, the recession could hit while you’re haggling back and forth with a buyer who originally offered a price you were happy to take, and then that possible buyer who would have happily bought your house a couple of weeks ago will suddenly find themselves in the candy store of a buyer’s market and most likely tell you to go negotiate with somebody else.

Recessions are cyclical – if you miss this one, another one will come along in a few years. A seller who is able to adjust the timing of their home sales based on the economy is well placed to profit from the ups and downs of home values; however, it is important not to overcorrect and try to sell too close to peak times.

It is difficult when you were planning to sell your property only for it to sit on the market. Maybe you’ve received no offers or offers that are too low that it doesn’t make sense to sell. In either case, renting out the property can make for an excellent new course of action. Even if renting the property began as your Plan B, we can help you turn it into a successful Plan A.

Renting a property isn’t always as easy as it may seem. It’s important to be intentional with your property, as you would any other investment. It’s important to hope for the best and plan for the worst. This means having an appropriate maintenance reserve savings account, should something go wrong. This also means knowing that some maintenance items will naturally arise– some big and some small. 

Renting your property can be an amazing way to build wealth over time. Some landlords may see instant cashflow from their rental property and most will see the long term appreciation growth of the property. There are some major benefits to renting out the property: 

• Having the mortgage paid down 
• Potential cash flow
• Owning an appreciating asset
• Tax benefits
• And more! 

Even if your ultimate goal is to sell the property, you may see that renting the property in the interim has amazing benefits– so many that you may choose to ultimately continue to rent out the property. Owning real estate is one of the best ways to generate wealth and potentially even financial freedom. 

• Tax advantages
• Inflation protection
• Monthly income
• Long term appreciation of property
• Mortgage pay-down
• Providing safe and desirable housing to those who cannot or choose not to buy a home
• Having stable investments
• A retirement plan
• Potential to grow– utilize your rental property equity to purchase additional properties and watch the benefits grow exponentially!

The best part is when you hire an amazing property management company, you won’t even have to worry about being the landlord– this will be a completely passive investment and income opportunity for you. 

If you’re looking to change your Plan B to Plan A, we’d love to help! If you live in the Colorado Springs area, read here about what house prices are doing there, and if you are interested in the Denver market, please read more here.