Recession

Gordon's Duplex Experience

Lessons Learned from a Recession

Gordon Reeder

When I bought my duplexes in Austin it was a charmed situation. Almost anyone could make money in real estate at that time. Rents were high, prices were low and increasing. My how times have changed. The good times have been replaced by a deep recession that seems like it will never end.

Let's look at some of the changes and see how they affect the rental investment market.
1) Interest rates are at all time lows. This has made mortgage payments much more affordable. This is good if you are buying a duplex, because you will have lower mortgage payments. But it has also made it easier for 1st time home buyers to buy a house. This has depleted the pool of renters. With fewer renters, rents have held steady for the last few years. In some markets rents have gone down. With smaller pool of renters there is an increase in vacancies with a corresponding loss in income. Furthermore the quality of the renters has gone down. The better renters found that they could qualify for a mortgage and became homeowners. This left the pool of renters crowded with low income poor credit renters.

2) Unemployment is up. This has two effects. First, you may find yourself with a renter who suddenly can't make their rent payments. How you deal with that is up to you. At best they will tell you they can no longer afford to live in your building and move out (possibly breaking a lease). A second effect, contrary to what I said in the previous paragraph, is that suddenly unemployed homeowners are loosing their homes. This is putting them back into the rental pool. Because they have been home owner's they know how to take care of a house so they treat your property well. So what if their finances are a bit shaky. I'll generally cut them some slack on late fees if they are otherwise good tenents.

3) Investment returns on Wall street are low. What does this have to do with duplexes? Usually nothing. But when the stock markets are not creating good returns on investment, investors look to other places to put their money. Typically that would be the bond or money markets. But with interest rates low, those markets weren't creating good returns either. Sure enough, everyone discovered real estate. The sudden influx of inexperienced investors caused a speculative bubble in the real estate market. Many duplexes were being bought at prices that could not be supported by rental income. In the last year we have seen the bubble burst and prices are returning to more reasonable levels.

A second effect has been that duplexes and other investment property has been snapped up quickly by eager investors creating a seller' market.

Many investors are taking a beating on their rental properties. They can't generate a positive cash flow and are bleeding money each month. But they can't sell them because they would loose money on the sale because values have gone down since the bubble burst.

4) Insurance payouts are up mostly due to court ordered mold and mildew damage payouts. Insurance companies have raised their premiums to compensate. The premiums are usually collected as part of the monthly mortgage payments. Not only that but tax payments are up as well (see item 3). So although the PI in PITI is still at the same level, the TI part has gone up.

So what? If you recently bought a duplex: Sit tight if you can. Time mitigates all risks. In a year or two the economy will be better and rents can be raised. At that time you can see a return on your investment. If you bought before the run up in prices: Now is a good time to think about selling. You have lots of equity in you property. Release the equity by selling and do a 1031 exchange into a larger property. Of course, if you like how your investment is working for you right now; well just hold onto it and keep enjoying it.