Why You’ll Never See A Downturn Coming And How To Grow From It

The year was 2015. Yeah, not that long ago really but it sticks in my memory as a tough year.

Things had been going pretty well for me financially up until this point. I’d hit 25 years old and managed to garner 4 rental properties all providing nice returns on investment by the room.

The Christchurch rooms market was steady, a single room went for a minimum of $160pw and a double for $220. I had one house that now became a 6 bedroom, due to the addition of a sleepout in the garden that was returning $1080pw. This was from a properties that cost about $250k, so as you can imagine I was pretty happy.

Christchurch was riding the coat tails of the earthquake. As much as it brought great difficulties and undoubtedly did a great deal of hurt to a lot of people, there was undoubtedly a temporary economic boost to the area.

My rooms were mostly rented to international EQC workers. They weren’t looking for somewhere to settle down for a lifetime, just somewhere to rest their heads for a few months whilst working. Somewhere that didn’t cost them the earth as even my high rental rates were a little below the norm.
With having a number of people in a house, wear and tear starts to accumulate. Chips out of paintwork, the garden gets overgrown, the house gets untidy but you know, at the time, it didn’t feel like a big deal.
I knew I could put up an advert on Trademe (those were the days, I’ve not used Trademe for renting out rooms for years now!) and my phone would ring off the hook for half a day until the room was full.

‘Why should I improve things?’ I thought. ‘These places are shooting up in value, the tenants will only break stuff anyway and the rooms get rented out in no time.’

So, it went on and by this stage, the houses were all getting pretty shabby. I hadn’t put much aside for them because with such strong cashflow, I could always rely on just taking any maintenance out of that, right?

Then May hit. It was cold and unforgiving in every sense.

The first signal something was wrong came early on but it sounded just like the normal ebbs and flows of the year. There was a mass exodus and roughly 6 rooms emptied out within 2 weeks. This might sound drastic but really, it’s not that unheard of in my end of the market as travellers don’t like winter so much. They move on to the next place with a job and a bit of sunshine.

Now I put up the ads, I did put up some pictures I’d taken on my phone, which I hadn’t before.

There were no calls.

I checked the ad, made sure I hadn’t mistakenly put my phone number down wrong. Nope, all correct.

Then a couple of days passed. Nervously, I decided to drop the price by $10pw. There were a couple of texts but I didn’t get any replies when I responded to them.

Then another $10pw off. The cost of having these rooms empty, maybe $200pw greatly outweighed a measly $10pw in lost potential income.

A few calls and a couple of viewings. People came over to look, they were the exact sort of person that only a month before would have jumped at the chance to rent a room at these prices. What was happening?

The air in which they viewed was entirely different. Before, the choice was in my hands, it was a complete sellers market and everyone knew it. They used to talk to me on a level, I’d learn a little about them as a person, what they did, what they’re wanting to do in Christchurch and maybe share a joke or two and we’d come to an agreement.
Now there was no eye contact, just a quick scan around and a short ‘thankyou’ and ‘I’ll let you know’. It felt alien. ‘I’ve just got a few more places I’d like to look around’ became the new catch phrase.
When asked, the house viewers simply said that it’s nice but not what they’re looking for. ‘Was it the price?’ ‘Was it the location?’, usually met by replies of ‘No, no it’s fine, just not for me.’

In business, people don’t usually tell you what’s wrong verbally, they only say through their wallets. They’re nice people and they don’t want to be the ones to hurt your feelings.

I dropped my deposit amount from 3 weeks rent to 2 weeks. I had a little more luck, I managed to fill a room or two but not in an ideal way, short termers that didn’t quite fit my ‘ideal tenant’ shortlist.

The rents came down another $10pw and there were enquiries but still few takers.

I removed a sleepout as some of the feedback suggested that people were no longer willing to live with 7 other people in a house, and what was once commonplace was now unheard of.

Then an entire house full of Irish guys decided to move into another house together, including taking the guy that had just moved in a few days prior. I’d really worked hard to get him in too!

This all happened within a few weeks. The speed was overwhelming. I had to do something fast as I was hemorrhaging cash.

Don’t get me wrong, I knew on some level that this EQC boom wouldn’t last forever but I always thought I’d see it before it hit and be able to make adjustments. The oft vaunted ‘soft landing’ (Clue: There’s no such thing, booms and busts are inexorably linked). In a lot of ways, this is borne out in the housing markets up north at the present and explains why bubbles happen. We all think we’re smarter than the other guy but we can’t all be right. The only truths we can accept is that we are all naive and that no one really knows anything.

By this time I was getting exhausted and frustrated. Rooms empty everywhere and the rooms that were full were at ‘discounted’ rates.
I sat in the car explaining my thoughts to my girlfriend. Possibly more like whinging and whining. She’s a fantastically patient girl and equally knows how to get me to do things and we agreed that I’d show her around as though she were a potential tenant and go from there. I was a bit nervous as, honestly, I was a bit fragile by this point. Constant rejection in the face of your best efforts can do that.

We opened the front door of the first place. Her review was blistering to me.

‘There’s hand prints up the walls, this furniture needs replacing, the shower curtain needs replacing, the bedding’s not up to scratch, the garden’s a nightmare, the TV remote doesn’t work, there’s no lady bin in the toilet, the walls need repainting………’

It went on. It was harsh and painful but it was exactly what I needed and we both knew it. I wasn’t emotional or silly enough to not take her advice. We spent weeks replacing nearly every article in the houses, cleaning, gardening, painting and making repairs. The most painful thing is having to spend thousands you’ve only just got when you’re losing money as it is. At times it was a juggling act with paying bills and doing the necessary work. I wasn’t really sure whether it was terminal and wouldn’t pay off.

Rents eventually settled at around $150 for a single and $190 for a double so pretty steady. Rooms filled up again. It’s never got back to those heady EQC days and a part of me wouldn’t want it to. I became complacent and weak as a result. I let hubris and laziness take over my business.

Over the last 2 years it’s been a process of constant improvement. We’ve started our website. I’ve learned a bit of amateur photography and my girlfriend helps me stage the rooms as I tend to get a little too practical. The houses have been repainted inside and out. The process is still ongoing, I’ve got bathrooms to replace and various other projects. Marketing has moved to Facebook, rather than Trademe and we’ve changed pretty much every supplier of anything. My personal spending has gone through the floor and frankly, I’m still in ‘survival mode’ this long after, I sometimes fret I haven’t done enough and will end up like this again. Rents have edged upwards ever so slightly. I managed to negotiate my interest rates down by around 1% on average which was an unexpected boon that really saved my arse.

My message is, if any of this sounds familiar, if you’re too comfortable, too complacent and not keeping a decent cash buffer and constantly improving your portfolio, you may be at risk. If you think it’ll never happen to you and you’re too smart and you’ll see it coming long before it hits or that rents only go up and interest rates only go down, you are most definitely at risk. I’m lucky and had great people around me and got a second chance, others might not be. Had interest rates gone the other way, although I would have likely survived, it would have been a far far more painful affair.

My thoughts as I was writing my last blog post on property was that it sounded too mechanical. It’s easy not to include the trials and tribulations, the self defeating psychology we all have and our own fallibility but realistically it’s the truth. The more we share the bad as well as the good, the more we can hopefully help others avoid it.

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Andrew Palliser

I'm a small sized property investor and self managing landlord of medium term room lets, making a desperate scramble for early retirement.

7 thoughts on “Why You’ll Never See A Downturn Coming And How To Grow From It”

  1. Great blog post!!! I really love this one as it reminds me market can change in a matter of months. The great return on rental, share market booming, low-interest rate… all of them won’t last forever and you need to always prepare for that. I guess you can get past that because you are not mortgage to your eyeball and have a rainy day fund.

    1. Yeah, I really think that a lot of blogs become too mechanical and ‘how to’, without acknowledging the risks. I’m pretty highly mortgaged in my opinion but from an LVR standpoint it’s OK. As you say, being constantly ready for change is the best defence.

      I’m glad you liked it, I thought I’d take a risk and write something a bit different.

  2. Really valuable post, thanks for sharing your experiences. I am coming up 1 year as an independent contractor, it’s going great, always plenty of work flowing, it’s so easy to see the world behave a certain way for a whole year and expect it to continue. But I also work in a boom and bust industry, now I realise I need to think harder about what will happen the week that I go to do the next job and suddenly find my backlog empty.

  3. Great story. There is so much written about rental property investment that focuses on the investment and fails to talk about the rental (the work of dealing with people) and the property (maintenance etc). To be honest I’m glad to be invested in shares instead – less hard work!

    1. Completely, the numbers are only half the story.

      The main reason I’m currently doing property is the leverage. Started off with $50k cash 4 years ago, it’s now worth somewhere in the region of $630k in equity and pays me ~$45k per year to boot. The majority of that isn’t off market rises but paydown of debt and renovations. Simply not possible with shares, you can’t add tens of thousands in value from a few weekends of painting and tidying up.

      Once the debt levels come down, I too will be switching to shares, the main advantage being the passive nature of it.

      Could be a subject for another post…..

  4. It’ѕ genuinely very difficult in this full
    of activity life to listen news on TV, thus I only use the web
    for that reason, and obtain the most recent news.

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