What To Do With Your Rental Property Investments If The Housing Market Crashes

The housing market is known for its long-term stability and consistency, but, like all investment types, it can fluctuate over time. On the bright side, property values have generally continued to rise throughout the last 50 years, with average home prices increasing over 16-fold during the same period, as shown by the Federal Reserve real estate market analysis data.

Real estate tends to be a reliable investment, even though no investment is risk-free. But, what would happen if the housing market drops while you own rental property?

What Happens to My Investment if The Market Crashes?

All investments — whether in stock, gold, mutual funds or cryptocurrency — carry risk, and real estate is no exception. However, Arrived Homes, a platform that allows retail investors to purchase shares of rental properties, strives to make these investment types as stable as possible by offering a minimum hold period. 

This way, you don't lose your funds to panic because property appreciation is statistically likely to bounce back when the market does, even if there's some short-term instability.

Of the plethora of investments possible, single-family home prices and rentals have surged over time, according to relevant data. Therefore, experts advise investors to consider long-term real estate investments because they yield cash flow and appreciate in due course.

See also: Real Estate Investing Has Changed And A New Investment Strategy Is Emerging

Should I Sell or Hold?

Arrived Homes offers some advice for handling market fluctuations. 

As investments reach the end of the hold period, Arrived evaluates the potential options you have, figuring out what makes the most sense for your situation. Arrived Homes’ advice to investors is to hold properties for as long as possible, allowing the housing market enough time to rebound; the property continues generating cash flow in the interim.

Selling during a market slump hurts your investment, negatively affects other property values in the area and ultimately harms the market further. To avoid this, Arrived uses two key strategies.

Proper Use of Leverage

The first approach involves using an amount of debt of 55% to 70% on each property, which is safer than a higher mortgage percentage. In addition, the firm's estates have repayment terms longer than seven years, allowing for flexibility in the investment hold period.

Additionally, Arrived properties' loans are interest-only, meaning that the monthly payment is considerably lower than an amortized loan, but the cash flow is higher. The average Arrived property has a debt service coverage ratio of almost 2. This means that the estate's operating income could decrease by 50%, but it will still generate enough revenue to cover the monthly interest fees.

Cash Reserves

When calculating how much money a property needs to raise from investors, Arrived also includes a cash reserve balance. In case of an extended vacancy, unexpected repairs or other issues, the cash in the reserve balance can be used to cover the dividends and additional costs.

If the reserve depletes, Arrived can take out a business loan or raise more funds. Even in the worst-case market scenario, when the property's value would be down temporarily, the firm's objective is to distribute cash flow generated by the estate to investors. So even if the market is down significantly, investors still get their dividends.

When Should I Invest in Real Estate? 

The idea of any type of investment is to buy low and sell high. However, things are slightly different regarding real estate because it's wise to invest in it whether the market is up or down.

Although past performance isn’t a guarantee of future success, with real estate, the possibility for profit is strong since the trends indicate a substantial, consistent upward growth. Also, because real estate investments yield income from both dividends and appreciation, you keep earning passive income regardless of the property's short-term worth.

Even if you don't always buy at the lowest possible price, the long-term gains and appreciation can be significant. Likewise, investing when the market is down can be a wonderful short-term strategy because you can buy houses at a great deal and enjoy even more appreciation when the market recovers.

Arrived Homes allows individual investors to buy shares of rental properties with as little as $100

Conclusion

Like other investments that promise rewards for investor risk, the housing market has its ups and downs; however, in the long run, both rent growth and overall property values have tended to increase over time.

Investing in real estate shares through Arrived Homes allows you to benefit from some of this long-term gain while avoiding short-term problems such as vacancies or value declines. In addition, Arrived is prepared for any contingency with extensive hold periods, cash reserves, and the flexibility to extend the investment.

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Photo by todd kent on Unsplash

This article was originally published on January 31, 2022