What Happens To The Minneapolis Duplex Market In Tough Economies?

Even though I survived the Great Recession as a Realtor and real estate investor, recent stock market volatility and talk of a recession inspired me to revisit the impact these types of events typically have on investment property.

Here’s the good news. Duplexes, triplexes, fourplexes, and apartment buildings are considered to be more resilient than other kinds of investment property during tough economic times.

In fact, there are even several potential upsides:

1. Stable Housing Demand: When times are tough, many people may downsize or try to reduce their housing expenses. This can increase demand for rentals. During uncertain times, many people also don’t want the financial commitment of home ownership.
2. Lower Interest Rates: A recession is a sustained period of significant decline in economic activity. To help boost investment, the central bank often lower interest rates.
3. Defensive Asset Class: Duplexes, triplexes and fourplexes are often seen as a safe investment because people always need a place to live, even during tough economic times.
4. You Can Do Something About Your Investment Property – We can’t do anything to improve the weather or performance of the stock market. However, even during the most difficult time, housing providers can always pick up a paintbrush or a rake and do something to improve a property’s performance.

Of course, whenever there’s an upside, there’s also a downside. Challenges found during tough economic times can include:

1. Rent Collection: Recessions tend to cause job losses and lower incomes. Of course, this may lead to delayed or even non-payment of rent, and ultimately, evictions.
2. Decreased Property Values: Even though interest rates may drop, seemingly making properties more affordable to purchase, the fact is higher vacancy rates and tighter bank lending criteria tend to reduce the number of qualified buyers for a property. Lower demand due to fewer buyers results in lower prices.
3. Increased Operating Costs: Supply chain interruptions and inflation may occur during a recession.
4. Financing Challenges: Lower interest rates are great, if you can get a loan. The trouble is, banks are run by humans. And just as we individually become more risk-averse during tough economic times, do banks.
5. Demand Shifts to Lower-End Properties: Tenants may not be as willing to pay as much for rent if they are living in a time of economic uncertainty.

The only way to diagnose a recession is by looking in the rear view mirror. Nobody has decreed it yet, so there’s no need for undue concern. However, there are some steps housing providers can take to be ready if one comes. Those include:

1. Keep Rents Affordable – Rather than raising rent to at or near market rate, being less aggressive with rent increases (unless there’s rent control) may help units stay occupied.
2. Don’t Overleverage – While it’s tempting to refinance and redeploy equity in another property, in a time of economic headwinds, it’s best to have ample cash reserves and equity to offset any downturns in cash flow.
3. Don’t Let Anything Slide – Stay on top of property management. Don’t let tenants get behind in rent, and when you have a vacancy, turn it quickly.

No matter what does or doesn’t happen with the economy, know this. We’ve most likely been through something similar before, and we’ll get through it again if it happens.

Let’s hope it doesn’t.