What could a potential recession mean for rental property owners in Santa Cruz?
Lately, there’s been increasing talk about the possibility of a recession in the United States. A recession is generally defined as a period of economic decline marked by reduced trade and industrial activity, often signaled by a drop in GDP for two consecutive quarters.
With nationwide inflation on the rise, many property owners are understandably concerned about how a recession might affect them. While rental properties often provide more stability than other investments during economic downturns, they aren’t completely immune to the effects of a recession.
One of the main concerns for property owners is the potential for vacant units. Below are some situations that could lead to vacancies during a recession, along with strategies to help mitigate these challenges.
Losing Tenants Due to Overpriced Rent
If your rental rates are higher than comparable properties in the area, a recession could prompt tenants to look for cheaper options. Property owners could find themselves losing tenants who can no longer afford their rent, as well as those who are simply seeking more affordable alternatives.
As of August 2022, rents in Santa Cruz have risen substantially, in line with trends seen across California. Many landlords are legally permitted to raise rents by as much as 10% due to inflation. This makes tenants more price-sensitive, so it’s important to ensure your rents are competitive within the local market to encourage lease renewals.
Filling Vacancies in a Hurry
During a recession, it may be tempting to fill vacancies as quickly as possible to recover lost income. However, it’s wise to be extra cautious when screening prospective tenants. Carefully review their credit, income, and rental history to ensure they have a strong track record of paying rent on time. It’s often better to leave a unit vacant for a bit longer while waiting for a reliable tenant rather than rushing into a lease agreement with someone who may cause issues down the line.
Offering Only Standard Lease Agreements
In times of economic uncertainty, offering flexibility in lease terms can make your property more appealing. Consider negotiating longer lease terms at slightly lower rates. This may help you secure tenants for a longer period and reduce the risk of turnover. You might also offer incentives such as fee waivers, rent discounts, or allowing pets, which could expand your potential tenant pool.
Being Unwilling to Negotiate
During a recession, job losses and financial strain can make it difficult for tenants to pay rent. Rather than immediately resorting to eviction, consider working with tenants to create a mutually beneficial solution. This might include offering payment plans, temporarily freezing rent, or using the security deposit to cover rent. You could also request a larger security deposit from new tenants to help build a financial cushion during tough times.
Outdated Property Features
If your units haven’t been updated in a while, consider making some improvements. New appliances, upgraded flooring, or even simple changes like fresh paint can make your property more attractive to both current and potential tenants.
Upgrades to shared amenities—such as fitness centers or community spaces—can also help boost the appeal of your property. While these updates come with upfront costs, they can pay off in the long run by reducing vacancies and increasing tenant satisfaction.
Neglecting Maintenance
Now is the time to address any lingering maintenance issues. Regular upkeep can prevent minor problems from becoming costly repairs later. This includes addressing leaks, structural concerns, and ensuring doors and windows are properly sealed. Keeping common areas clean and well-maintained is equally important to maintaining a positive image and tenant satisfaction.
Managing Tenant Expenses Beyond Rent
During a recession, tenants may struggle not only with rent but also with additional monthly costs, like utilities. You can help by installing energy-efficient appliances, upgrading insulation, or adding other features that reduce energy consumption. Helping tenants save money can increase their likelihood of staying put during tough economic times.
The Silver Lining...
While a recession presents challenges for property owners, there’s one significant advantage: The housing market typically suffers more than the rental market during economic downturns. With fewer people able to afford homeownership, the demand for rental properties often increases. This can lead to a larger pool of potential renters, providing more opportunities to find qualified tenants.
In addition, rents generally don’t drop during a recession; they tend to remain stable or even rise slightly, which can help cushion the impact of any vacant units. In a city like Santa Cruz, known for its tourist appeal, you might even consider creative options like turning vacant units into short-term rentals or temporary vacation listings.
By planning ahead and considering these strategies, you can position yourself to better manage the effects of a potential recession and continue to succeed in the rental market.
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Logan Andren
Logan Andren is the founder and CEO of Andren Homes Property Management. Since launching the company, Logan and his dedicated team have simplified the rental property experience for numerous Santa Cruz homeowners. Their mission is to enhance the lives of their clients and community, focusing on providing exceptional service and fostering lasting relationships. DRE #02002055
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✆ : (831) 291-5043
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