If my rentals were only projected to make its rents for a year and 1/2, and then who knows, I wouldn't be buying them, personally.
I want FIRE income for 30+ years. Not two.
:)
I am just saying I am not 100% convinced that the rents are as secure as people make them out to be. We could get in an economic situation where real estate taxes go up but rents go down.
No doubt that could happen, I just think that:
a) It's unlikely, and
b) Even if it did happen, it wouldn't be that bad.
And you should always be prepared and have reserves and a buffer in your cash flow anyways.
See what John and I wrote about a buffer over in this thread:
http://forum.mrmoneymustache.com/index.php?topic=1936About leverage and negative cash flow.... I'll grant you that the more you are leveraged, the faster you can go cash flow negative if you can't find a tenant. And believe me, I worried about that when I was first getting started. But if you are running a place that is extremely cash flow positive (i.e. well over 1%), it would take months of vacancy each year (or a much reduced rent) to generate negative cash flow over an annual period. One metric I like to calculate for each deal I pursue is "breakeven occupancy" along with it's counterpart, "breakeven rent", where cash flow is concerned. This gives me an idea of how bad things would need to get before I'd actually be cash-flow negative.
Well said.
I could have about a 75% vacancy rate right now and break even after PITI, though any maintenance occurring on those other 25% would put me cash flow negative. If I use standard assumptions for that, I could have around 30% occupancy and cover everything, but have no cash flow for myself to live on.
Given I don't ever expect more than a 20% or so vacancy rate as a worst case scenario, I'm not too worried about being cash flow negative.
Even when multiple properties go vacant at once, which happens (due to variance and the law of large numbers), you want to be fine in that circumstance by having your other properties cover that (AND have large reserves on top of that).
Be smart, play it safe, but don't worry or lose sleep about it, just plan and prepare.
If instead of the vacancy, my rents could drop 75% (the numbers work out the same... Basically I'm losing 75% of my rents) and I'd still be fine. Do you see rents dropping from 1000 (my current average) to 250?
How bad of a scenario are we talking
I can't see it. Dropping to 900, sure. 800, possible. 700, pretty unlikely. 250? Heh. I think we'd have bigger issues to worry about.
Example: Vegas in the housing crash lost 60% of its value from the peak while rents dropped 5%.
So, sure, rents can drop in certain circumstances, but they're one of the things that tend to hold steady or go up over time (like food).
You just don't see a 30% decrease in rent overnight.
Historically, it's quite rare for rents to decrease. How often have you lived somewhere and the landlord decreased your rent instead of increasing it? (If they do, it's usually to keep a good tenant, and it's raised up after they move.)
AND, if we were in some sort of situation where rents decreased, it'd also probably be a situation where your FIRE expenses would be decreasing as well due to that economic climate (some sort of deflation) decreasing your expenses, so your decreased expenses likely would match the decreased rent.
Just as how if your expenses go up, your rents are likely to go up, the same economic factors should help protect you in this scenario.
to;dr: it's unlikely, but even if it did happen it probably wouldn't be that bad, and even if it did, and was, your decreased expenses should offset that and you'll be fine anyways. End of the world scenarios aside.