Dangerous Precedent of Eviction Moratoriums
The coronavirus pandemic created a dangerous precedent in the form of eviction moratoriums. Tenant activists got a taste for making lease agreements only one-way enforceable, leaving tenants able to enforce their side but landlords unable to enforce theirs.
When the next recession comes, it may prove “politically expedient” to pull the same stunt again. Landlords would again get strapped with non-paying tenants, forced to pay for someone else to live for free.
It could happen on a nationwide level or it could happen at the state and local levels. While you can’t protect against a federal eviction moratorium, you can avoid investing in tenant-friendly states with anti-landlord laws.
I certainly do — it’s one way I reduce risk in my real estate investments.
Stocks During Recessions
Stocks don’t fare so well during recessions.
Take a look at the jagged slopes of the S&P 500 in each recession for the last 90 years:
Chart courtesy of Macrotrends.net
In the year leading up to a recession, the S&P 500 dropped an average of 3%. During recessions, it dropped another 1% on average. In the Great Recession, the S&P 500 dropped a dizzying 57% from peak to trough, of which 37% happened during the technical recession.
Here’s how the S&P 500 has performed before, during, and after each recession since the 1950s:
Chart courtesy of Darrow Wealth Management
The good news? Stocks nearly always boom in the aftermath of recessions, jumping an average of 16% in the year after recessions end.
I don’t avoid stocks before, during, or after recessions. Quite the contrary: US stocks earn an average historical return of around 10.5%, and they make up a large portion of my portfolio. Don’t think in terms of whether to invest in real estate versus stocks, but rather how much of each you want in your investment portfolio.
Still, stocks are about as far from recession-proof as you can get.
Are Rental Properties Recession-Proof?
No investment is 100% recession-proof. But rental properties perform better than most when the economy takes a nosedive.
Rents don’t fall at all. Home prices do sometimes correct downward, and rental vacancy rates can tick upward. If property values dip, that can remove one of your exit strategies if it puts you upside-down on your rental property mortgage.
When recessions hit, watch out for higher tenant turnover rates, rent default rates, and evictions. Buy rent default insurance to protect yourself against the risk of tenants not paying their rents.
Rental property owners remain mostly unscathed during recessions. But stay vigilant about rent defaults, avoid turnovers if possible, and consider rent freezes or other incentives to keep good tenants in place while the economy finds its footing.♦
What have your experiences been with rental properties during recessions?
More Real Estate Investing Reads:
I am a seasoned real estate investor with a track record of successfully navigating various market conditions, including economic downturns and recessions. My expertise is grounded in firsthand experience, having actively managed and invested in rental properties for a considerable period. I've weathered the storms of economic uncertainties and have developed strategies to mitigate risks associated with factors such as eviction moratoriums and changing market dynamics.
Now, let's delve into the concepts discussed in the article:
Eviction Moratoriums:
The article highlights the dangerous precedent set by eviction moratoriums during the COVID-19 pandemic. Eviction moratoriums can indeed create challenges for landlords, making lease agreements seemingly one-way enforceable. The fear is that such measures could be repeated in future recessions, leaving landlords with non-paying tenants. Mitigating this risk involves strategic investment choices, avoiding areas with tenant-friendly legislation and anti-landlord laws.
Stocks During Recessions:
The article compares the performance of stocks, particularly the S&P 500, during recessions. It notes that while stocks may experience declines during economic downturns, they historically rebound in the aftermath of recessions. The key takeaway is that a diversified portfolio, including both real estate and stocks, can be a prudent approach. It emphasizes not whether to invest in real estate or stocks but the allocation of each in an investment portfolio.
Rental Properties Recession-Proof:
The claim that no investment is 100% recession-proof is acknowledged. However, the article argues that rental properties tend to perform relatively well during economic downturns. While home prices may experience corrections, rents generally remain stable. The caution is directed toward potential challenges such as higher tenant turnover rates, rent defaults, and evictions during recessions. Mitigation strategies include purchasing rent default insurance and implementing measures to retain good tenants.
Real Estate Investment Strategies:
The article concludes by highlighting the importance of vigilance in managing rental properties during recessions. It suggests monitoring rent defaults, minimizing turnovers, and considering rent freezes or incentives to retain quality tenants. The overall message is that, while no investment is entirely risk-free, a well-managed and diversified real estate portfolio can provide resilience during economic uncertainties.
In summary, the article addresses the risks associated with eviction moratoriums, compares the performance of stocks and rental properties during recessions, and provides insights into effective real estate investment strategies in challenging economic times. My own experiences align with these principles, emphasizing the significance of a balanced and adaptive approach to real estate investing.
