#4 “Don’t You Worry About Another Market Crash?”
A market crash might not bother you if you plan on living in your own home for 30+ years and the value today doesn’t affect you, but what about an investment in which your goal is to make money no matter what?
“If you want to feel secure in your investments, and not live in fear of another market crash, then simply run the numbers. Run the numbers. Run the numbers!”
Am I worried about another market crash like we had in 2007/2008? Yes, but perhaps not to the extent you may assume. You see, if another crash happens, two things can be affected: 1. Occupancy. 2. Rental Rates.
I want my apartments to stay occupied. The more people paying rent, the better. Most stable markets hover around a 5% Vacancy Rate. This means that any given property is 5% vacant, or 95% occupied. That’s a ‘normal day’ on a given property, but what if it all goes bad?
During the 2007/2008 crash in San Antonio, multifamily vacancy soared to 10.5%. (That means an average property was only 89.5% occupied). What do I do with that information? I simply factor that ‘worst case scenario’ into my analysis of any given property. If the property would still turn a profit, then I don’t let it bother me anymore past that.
For example, in my current property offering, we analyzed that the property can drop to a 20% vacancy rate (twice as bad as the last crash) and would still turn a profit and give a positive return to investors. Now, that is a worst case scenario but it paints a realistic picture of what you may be up against and how conservative analysis can give you peace of mind.
- Rental Rates
I also want my tenants to be paying competitive rates for their unit. This may vary from market to market, but in general, rental rates are not directly tied to housing prices. They’re actually tied more to income levels. (Yes, they may get hit to an extent, but if the housing market crashes and people can’t afford their homes, where do you think they go? They become renters! So rents tend to stay relatively stable).
But, just like with Vacancy Rates, I simply use worst case scenarios in my analysis of properties, and if it works out, then I move forward without fear.
For example, say the market does crash, and the rents on my Memphis properties drop by an astounding 30% or $400 per month! That would be terrible! Well, I would still be cash flow positive by approximately $50 per unit every month. That’s right, the rental rates could drop by 30% and I would still not lose money on my properties. Again, conservative analysis can give you peace of mind when investing in real estate.
That conservative analysis I’m talking about is all part of ‘running the numbers.’ What would it look like if vacancy goes up? If rental rates go down? Go ahead and assume the worst! If you want to feel secure in your investments, and not live in fear of another market crash, then simply run the numbers. Run the numbers. Run the numbers!
Would you like more details on running the numbers? I’m happy to walk you through a basic property analysis. Just reach out!