Are We At Risk of Recession? What Happens To Landlords During a Recession?

As uncertainty continues about whether the US economy is in or headed for a recession, it’s understandable that homeowners in the rental market — mortgage holders in particular — are wondering what this means for their household. This article will take a look at the effects of a potential recession and risks to mortgages. 

The effects of a recession and risk to rental property owners

In the past, recessions such as the financial crisis of 2008 triggered a dramatic drop in house prices and people who couldn’t pay off their mortgages. So with a recession threat looming in 2022-2023, some are nervous about what this could mean for housing again.

Our real estate experts have noted that the market looks different today than it did back in 2008. There’s been a shift in supply/demand and more homeowners have had an opportunity to build equity in their homes off the back of historically low interest rates. This has made the market less fragile and many areas have even held quite strong despite rising interest rates. 

Recessions are unpredictable and don’t always mean a drop in housing prices or even rise in mortgage default. What we have seen however, for years now, is that would-be homeowners are taking longer to get into the market and now their borrowing power has been dampened further by the rising cost of mortgages. It’s also considered risky to get a mortgage during a recession, which could see many potential home buyers stay in the rental market longer to see what happens. 

These factors have all contributed to the heat in the rental market, where competition and prices for single-family homes has continued to intensify. For rental property owners, this means that providing you can comfortably make your mortgage repayments and stay on top of any debt, owning a home on the rental market can still be profitable and deliver passive income. 

If you’re having an issue with the repayments for your mortgage or your rental property isn’t bringing in enough income to assist your finances, it’s time to assess your financial situation. Lowering costs or increasing the value of your home could be the smartest decision long-term, rather than selling if there is a downturn in home values. This gives you the option to build equity in the home and receive rental income while waiting for the market to grow again.

Belong can assist homeowners by providing a world-class home management service without the extra charges you might be paying a property management company. We also offer innovative financial solutions such as Split It, which allow you to stay cash flow positive and spread out the costs of things such as repairs, maintenance and even investment-boosting renovations. 

Learn more about how Belong is making renting lovable here. 

Is a recession good for home buyers and real estate investors?

If you’re considering acquiring a home during a recession to take advantage of lowering house prices, it’s worth taking a close look at your finances and employment situation to be prepared before taking on the risk of a new mortgage. There are also current issues of high inflation and rising interest rates that could be a bigger risk to mortgages than the recession itself.  

At a recent webinar on the housing market, our resident Asset Manager, Jon Martin from JDM Asset Management, was asked to weigh in on the topic of acquiring a home with interest rates on the rise. 

“At higher interest rates, fewer prospective homebuyers will qualify for mortgages (or at a lesser dollar amount) and will instead choose to keep renting. Rising rental demand will further push rents up – we’re actually already seeing that, with median nationwide rent passing $2,000 for the first time ever in May 2022,” explains Jon. 

If you are looking at acquiring a property for rent, Jon notes that now is a good time to keep a watchful eye for opportunities and price-drops in your desired neighborhoods, as less competition provides some welcome relief to house hunters. 

“While you’ll have to factor in a higher cost of capital when analyzing your next opportunity, the recent upward pressures on rents and the likelihood of locating an attractive single family rental are creating a more attractive market for acquisitions,” says Jon. 

“Another point to consider when looking to acquire a rental, for those sitting on cash, is a higher down payment than say the standard 20% to reduce your exposure to higher interest rates,” he adds. “This will only help when running the numbers to see if your rental income will cover your operating expenses and mortgage payments,” says Jon. 

Watch now: Catch the full webinar conversation here.

Should you pay off your mortgage before a recession?

During a recession and with the high rate of inflation, cash on hand becomes increasingly important. So while it’s a good idea to clear off high-interest debt such as credit cards or personal finance loans, you don’t want to pay off the mortgage entirely if it means draining all of your cash reserves.

Recessions can be brief, so a knee-jerk response may not be warranted or the best financial option for your situation, unless you have a minimal amount to pay down and are already in retirement. 

Recessions can increase the likelihood of redundancies and unemployment, so having cash reserves is likely to be more important than owning your home outright. This is because a fully-paid home won’t help your weekly budget if you get short on cash for essentials such as food and utilities. You will also need to consider long-term expenses such as college funds or retirement plans if they apply to your financial situation. 

Got more questions for Belong? Contact us 24/7

Whether you prefer email, online chat or a good ol’ fashioned phone call, we’re here to answer any questions you may have. Check out our homeowners page to get in touch or learn more about having your home loved by Belong.