Real Life Planning Podcast Episode 55: Steps Real Estate Investors Can Take to Prepare for the Next Recession
Real Estate CoachingIn Episode 55 of the Real Life Planning Podcast, Cynthia Meyer, CFA®, CFP®, ChFC®, provides a practical roadmap to help rental property investors prepare for the next economic downturn. While no one can predict exactly when a recession will hit, Cynthia shares how to proactively anticipate what you’ll do if a tenant pays late (or not at all), strengthen your financial foundation, and position yourself to take advantage of new opportunities.
" Recessions don't happen overnight. They're a normal part of the business or market cycle. ” - Cynthia Meyer
This week on Real Life Planning Podcast:
| 💡 | Why mindset is key for recession planning [00:02:01] |
| 💡 | How much cash should real estate investors set aside in reserves? [00:03:03] |
| 💡 | Tips for short-term rental owners during economic slowdowns [00:08:19] |
| 💡 | Why recessions can create new opportunities [00:09:40] |
| 💡 | Should you refinance if rates drop during a recession? [00:11:43] |
Takeaway Quotes:
" Every time that [mortgage] rate goes down in 75 basis points, or three quarters of 1%, you really should be running the numbers and thinking about refinancing and deciding if that makes sense for you. ” - Cynthia Meyer
" A recession can actually be a great time to invest if you are thinking about it wisely.” - Cynthia MeyerConnect with Real Life Planning:
About the Real Life Planning Podcast
Hosts Cynthia Meyer and Vekevia Tillman-Jones explore practical steps for real estate investors to build financial freedom and make working for someone else optional.
Episode 55 Transcript
[00:00:00] Cynthia Meyer: Are you ready for the next recession? On episode 55 of the Real Life Planning Podcast, today we're talking about preparing for the next recession as a real estate investor. 'cause let's face it, economic cycles are inevitable. I don't know for sure when we will have the next recession. I'm not an economist and even economists don't agree about when we're going to have the next recession.
[00:00:24] But let's face it, we've had some pre-warning bells of recessionary activity over the past month or so and the key to being prepared is to start thinking about this in advance. If we do end up in an economic recession in the United States, you won't be surprised.
[00:00:46] Let's start by saying that the- how do you know that the economy is in a recession besides just reading the major newspapers? Recessions don't happen overnight. They're normal part of the business or market cycle, right? But there are always signs. Typically slowing job growth. Rising unemployment. It's harder to get a loan. Slowing consumer spending, for example. Those are all indications that are pre-recessionary. Now, we do have economic downturns in the United States that don't lead to a full recession. And recessions have different depths or magnitudes, if you will.
[00:01:31] And so we don't know exactly what the next recession is going to look like and what opportunities this going to bring, as well. Nobody, nobody has that crystal ball. But in general, I am encouraging people to to be prepared as a rental property owner to start thinking, and doing some certain things if you haven't done them, they're always best practices.
[00:01:55] But if you haven't done them in a while, now is a great time to think about them.
[00:02:01] The first thing I would say is, let's talk about mindset, right? We want you to be prepared for a recession if we have one. You want to be prepared to handle the expenses of your rental properties if you have an increase in a vacancy rate, or you have an increase in tenants who are not able to pay their rent or their full rent for a long period of time. I want you to think of your real estate as a business- of your rental properties as a business, and your tenants are your customers. And so consequently, I want you to really be thinking in advance about what- and rehearsing what would I do if we have a real big slowdown in economic activity if funds fall or if I have a tenant that cannot pay his or her rent.
[00:02:50] So just get ready for it. Something that- if it doesn't happen in your business right away, it will eventually happen in your business at some point during your life as a real estate investor. So it's always good to be prepared.
[00:03:03] Now the first thing is to strengthen your own financial foundation. And what does that look like, right? That means. In my opinion, it means you should have a multi-year budget for your rental property or other real estate business, right? So to your budget, do it in Google Sheets, do it in Excel, do it in QuickBooks if you're using that for your business. I want you to- I also invite you to build your cash reserves. Now, hopefully as rental property owners, you already have a personal emergency fund and an emergency fund or cash reserves for each property. But if you don't have enough think about building just like you have a personal emergency fund of, if you are a living full-time off of your investments, your personal emergency fund should probably be at least six months and 12 months would be even more significant, but of must pay expenses. If you are living off your doors, then a personal emergency fund or cash reserve of up to a year's worth of expenses, though, just the must pay expenses, the things that you must pay like groceries and mortgage and car insurance and things like that.
[00:04:23] If you've got that in short term cash reserves, like a high yield savings or a money market fund, CDs, that sort of thing, that's awesome. If you don't, at a minimum you're gonna start with working up to three and then six months of must pay expenses on the personal side. Now, on the rental property side, in general, I encourage clients to have up to three months of property expenses for every property that they own.
[00:04:51] Now this can vary a little bit if you live in a state where you have very low vacancy rate, for example. But you want to have cash reserves for each rental property. Should include the insurance deductible on each property and at least a couple of months expenses in case you had a long vacancy or you had a period of non payment. A couple of other things to do on the financial side is to review your insurance to make sure that you've got the right mix of the premiums that you're paying and the deductibles amount that you have in your insurance policy. We've got a couple of great blog posts about that we can add to the show notes.
[00:05:34] Making sure also that you have your security deposits for your tenants or your property manager has the security deposits held in an escrow or separate account is very helpful. So your personal financial foundation is extremely important heading into a recession.
[00:05:55] Once you've made sure that your own personal financial foundation is strong, think about the tenant relationships that you have. Now, whether this is you directly managing your rental property investments or whether you have a property manager, a couple of things to think about; especially if you're a newer real estate investor. You may not have experienced this before. Think in advance what is my policy for when tenants ask for rent relief?
[00:06:29] If you have a client who has lost his or her job, for example, how flexible do you plan to be about a client either paying less excuse me, how flexible do you plan to be about a tenant paying less than their rent every month. Making a plan to catch up, for example, how flexible do you want or plan to be? Can you articulate that policy so that you implement that fairly across your tenant population. So think about what do you plan to do and think about it in advance so that you have a policy then you can then turn to and implement if this happens and one of your tenant lets you know that they're unable to pay their full rent for month.
[00:07:13] What's your policy and process for communicating with tenants who are unable to pay their rent or pay late? Are you again, are you very strict? Are you or your property manager putting notices on the door according to your local law after the three or five days after the rent is late, if that's allowed. Or do you have another way of communicating with tenants and giving them a gentle nudge when their rent is late?
[00:07:39] If you would be willing to modify rent during a tenant's period of economic distress. Let's say they lost their job, for example. Do you have a sample rent modification agreement? What's your plan to deal with unpaid water or garbage bills or other unpaid utility bills that you are responsible for? How will you deal with the possibility of higher tenant financial stress, which often happens during recessionary periods. The likelihood of that is, is always a possibility if you're a landlord, during a recessionary period, the likelihood goes up a little bit.
[00:08:19] If you're a vacation property owner, think about what your plan will be for generating income from your vacation properties if your short-term rental bookings are weak. Now you may turn to midterm rentals, for example, or turn the property into a long-term rental if your vacancy rate on your short-term rental is extremely high, or your cost per night is- your revenue per night is falling think in advance, what will I do- at what point if my bookings really start to fall? Will you update your listings to allow for longer stays? How does that work in conjunction with the landlord tenant laws in your state? Do you have additional marketing things that you can do? For example, if you have a list are you sending newsletters to that list? Are you letting them know when there are deals or vacancies, for example, where somebody might book it at the last minute?
[00:09:18] Any additional publicity that you want to do about your particular property. Is now a good time to put up a website for the property for example, if you don't have one already?
[00:09:26] Are there any things that you can do to differentiate your property so that it continues to be booked even during periods of recession? So your vacancy rate is lower even if your nightly rate isn't any higher.
[00:09:40] The third way to prepare for a recession is to start thinking about what opportunities could arise in the next recession. A recession can actually be a great time to invest if you are thinking about it wisely. My husband Steve and I started buying rental properties during the Great Recession and we had been preparing for where we wanted to buy. And so when opportunity presented itself to us, we had cash on the side and we were ready to deploy it. So we could buy at a time when prices were a little bit reduced.
[00:10:24] Do you know what type of property you want to buy next? What market is it in? Do you have your real estate team in place? Do you have a property manager and an investor friendly realtor and an insurance agent, for example? Do you need a 10 31 exchange intermediary? So be ready to make investments if you are looking to add to your portfolio. Know exactly the kind of thing that you want to buy, and then you can move quickly if the deal presents itself.
[00:10:55] Is this a time that you can diversify your real estate portfolio? Are there opportunities to add doors or to improve your cash flow? That's a good thing to be thinking about in advance, as well. So every recession does have opportunity. It could be that the opportunity might not be in real estate. It could be the opportunity could be in securities or perhaps in buying another type of cash flowing business and so having some alternatives for yourself to deploy your cash during a general economic downturn is, to really think about, okay, here's my first choice. Here's my second choice, here's my third choice.
[00:11:33] Cynthia Meyer: The key is to be ready to act and prepared to implement one of those choices when it looks like it's the right time.
[00:11:43] The next thing to be thinking about is keep an eye on mortgage rates. For many of us who've been investing for a long time, our rates were actually much lower than what they would be now if we went out and got a new loan in the marketplace. But rates are coming down a little bit. And just keep an eye if you've bought a property in the past couple of years, you may have a rate that's in the high sixes or in the sevens and looking for an opportunity to refinance during a market downturn, an economic downturn.
[00:12:11] Looking for an opportunity to refinance during the recession. You may do that more than once if we have a long recession, for example. Okay, so every time that rate goes down in 75 basis points, or three quarters of 1%, you really should be running the numbers and thinking about refinancing and deciding if that makes sense for you. So keep an eye on mortgage rates and be prepared. Have all your documents ready to go so that if you do want to refinance, you've got everything sitting in a digital folder somewhere so that you can do it quickly.
[00:12:46] Those are some tips to get ready for the next recession.
[00:12:49] We actually have a landlord recession assessment, a little self-directed quiz that you can take. We'll put the link to it below. If you want to give us your email address, we'll send you the landlord assessment.
[00:13:04] So to conclude, are we in a recession? It doesn't seem like we're in a recession right now as I record this in March of 2025. But I am a little bit concerned that we are headed for our next recession and it, I certainly hope I'm wrong, but if I'm not, hopefully you'll be prepared for when it comes.
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