How landlords can protect themselves in a recession

As an investor it is important to protect yourself against as many scenarios as possible. A recession is one of the biggest scenarios that will affect any investment, property is no different.

The following suggestions are just some tactics that Fabrik has taken on their portfolio. However, you should get professional advice as this is purely opinion based on our own experience with 50+ properties

1. Aim to become low geared on your property portfolio

Many investors and landlords will likely be high geared. What this means is property is purchased through mortgages and loans as raising 100% capital is difficult for most people.

If interest rates raise in a recession, then you will not want to be paying this interest. At this stage you may be better off raising capital through selling assets to pay of as much of your loan/mortgage as possible. This way you will not be paying the increasing interest rates.

The below chart shows the difference between gearing at 50% and no gearing with total and annual returns.

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If the market value decreases then the bank/lender will see your property as being worth less but will still expect you to pay back on the original agreement. You could potentially be in negative equity in this scenario. Therefore selling other assets to pay of these loans is a better option.

Although this is not ideal it is one of the better positions to put yourself in.

2. Build a residential portfolio

Try to build a residential portfolio if a recession is close as residential will be more stable than other options such as short-term-lets or commercial.  However, this is also dependent on the area. Some areas could see a massive decline in industry and business and people therefore cannot afford rent or may have to move away.

Typically, you are a more likely to be safer with a residential portfolio of property.

3. Invest in Inflation hedges

Data currently suggests that we could be heading into an inflationary recession as the CPI is high, like what we saw in the 1980s.

When this occurs, commodities tend to perform well. This may be because investors see these commodities as safe places to hold cash.

This means you are good to buy commodities such as Gold, Silver, Oil, Copper, Aluminium among many others as early as you can in a recession or before these commodities rise.

Other possibilities could be investing in Crypto, however, this is completely unproven and still comes with a lot of risks.

4. Bring expenses down

Bringing your expenses down is another way to protect yourself financially, even if this is just a temporary measure. This could mean holding off on non-essential maintenance and refurbishment costs, conducting certain work yourself, or maybe try negotiating management fees.

5. Increase rent

An obvious option is to try and increase the rental value of your property. This may not be a popular but it is an option.

6. Never stop looking for deals

Don’t stop looking for property deals. At Fabrik we are still looking for deals buying properties despite personally forecasting a recession. If you conduct your research properly and still find a good deal, then there’s no reason not to go for it. There is also the chance that other investors panic and are willing to sell at a low price, take advantage of this if you can.

To find a good deal take a look at our article on how to invest 100k, where we walk through our own process of finding and calculating a good deal.