What Investors Can Do to Help Prevent Another 2008-Style Housing Crisis

by | BiggerPockets.com

Financing for investment properties can be risky, and it can end up costing you BIG if utilized incorrectly.

A whole new generation of real estate investors is being set up to fail — for the benefit of the big banks. Are you falling for the con? How do we beat them?

Battles often rage in the BiggerPockets Forums between those who detest the idea of any debt out of principle versus those who insist that you can’t get ahead financially without using credit and borrowing from big financial institutions — and who see failing to borrow as being small minded and foolish.

So is there some way to find balance in using leverage that will allow individuals to scale their finances quickly? What factors should real estate investors be savvy to now?

The Biggest Scam in History

Looking back at the financial crisis of 2008, many might consider it the most massive con in the history of our planet. Millions lost their homes — and still are losing them. Then the banks that loaned the money to pump up the market (and who simultaneously crashed it) began taking those homes for pennies on the dollar!

Related: New HUD Guideline Warns Landlords Against Denying Housing Due to Criminal Records

Then they began renting and selling them back at higher prices, with new loan fees.


If you haven’t yet, you’ve got to watch:

This has proven to be a game so profitable that it may prove irresistible not to repeat it.

What to Watch Out For

What I’m watching out for now includes:

  • How affordable properties are for regular people
  • The amount of middlemen adding multiple layers of fees to investments
  • The return of no money down 
  • Home buyers falsely claiming properties to be investments to borrow more money
  • New investors taking out adjustable rate loans and lines of credit in the face of rising interest rates

I’ve seen the aftermath of mass over-leveraging, so I’m carefully watching the data so I am never caught short.

Do You Really Know How Much You’re Paying for That Property?

Conspiracy theories aside, borrowing money from mortgage lenders can be extremely costly. There can be benefits of buying more properties faster. However, investors must be clear on how much of their profits are being lost to the bank when borrowing.

Check out Bankrate’s closing cost calculator to see how much average closing costs are in each state. This is at least a couple thousand dollars straight out of the profit. Then there are normally extra taxes on money borrowed, as well as additional mandatory insurances, which can run into the thousands of dollars range.

Then look at the interest:

On a $250,000 loan, with a 6% interest rate over 30 years, borrowers will pay $289,595.47 in interest alone. That’s enough to buy a second property cash!


How to Win

Over-leveraging is risky. No question about it. That is true for individuals and countries alike. It’s also true that without any leverage, the average individual and family is going to have an incredibly tough time trying to get ahead and experience growth without taking on too much risk. And clearly borrowing big digs deep into any gains you make. So what’s the solution?

Related: The Real Estate Market: How to Analyze and Predict Cycles

I’ve personally chosen to take a page out of The Intelligent Investor and Warren Buffett’s playbook. That means winning the long game by investing consistently in good properties, in good markets, at fair prices, which are throwing off positive cash flow.

I’ve also watched closely how Buffett has used leverage. This is increasingly through capital partners and by investing alongside others who share his values. He has done this in real estate and for his largest and most profitable deals. In other words, individual investors can get together with those who share their values and investment philosophy to control well diversified portfolios of income-producing properties. That provides strength, reduces risk, and minimizes expenses in order to maximize the bottom line.


Big banks have one mission. That is to make as much money as possible, at any cost. All too often the small investor is the victim of that. Right now, they appear to be repeating many of the same old moves. Leverage is needed. Even borrowing can sometimes be necessary and beneficial. However, I am afraid that many aren’t doing the math on what they are losing and may be putting themselves at risk.

Investors: How do you ensure you’re using leverage in a safe way to grow your portfolio?

Let me know what you think with a comment!

About Author

Sterling White

With just under a decade of experience in the real estate industry, Sterling currently manages over $10MM in capital, which is deployed across a $26MM real estate portfolio made up of multifamily apartments and single-family homes. Through the company he co-founded, Holdfolio, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single-family investing and apartment investing to wholesaling and scaling a business.


  1. You make some good points regarding leverage risk, but it also seems you may be laying some blame on the banks that should be directed elsewhere, or at least be shared. Much of the housing crisis was caused by Gov’t policy originating under Clinton, and continuing under Bush. HUD establishes quotas for loans below the median income, and between 1992 and 2007, these quotas went from 30% to 55%. A large portion of these loans were sub-prime.

    I’m also not sure about banks taking homes for pennies on the dollar and then selling them for a profit. I could be wrong here, but as an investor at that time it seems to me that banks had many properties on their books at significant losses, they generally did a poor job managing their REO portfolios (resulting in deteriorating properties), and many homes sold for well below the loan amount – a loss for the banks. If there is a way for banks to generate big profits using this model, it eludes me.

    • Sonia Spangenberg

      My take on what actually happened is pretty much as you stated. Government had a huge role. Banks made stupid decisions too. They don’t even know want their own internal departments are doing. If you try to negotiate a short sale with the loss mitigation department and they reject your offer, then later as you follow the status of the home you learn it sold at auction for less than you offered preforeclosue, you know they are stupid. Now they add legal fees to their loss. Nobody looks at the big picture in our culture. It’s actually embarrassing.

  2. David Roberts

    What is considered “over leveraged”? Nobody ever defines that.

    If thats a negative cash flow situation where inflating prices arent happening, I would consider that over leveraged. But being all in at 75% and cashibg it out with a couple hundred a month in cash flow after capex, repairs, maintenace, management, seems ok. The bank should be rewarded with interest for taking the risk. If you are cashed out you have no money in the deal anymore amd while your name is on the line, you can repair credit much faster than you can recover seed money.

    I dont like to use the word appreciation, because i believe prices inflate, and houses depreciate. So does the IRS.

    • Sterling White

      Over leveraging is when you run into a situation where the income of your property is not enough to cover the mortgage for simplicity purposes. Where some people can get in trouble is when they were already negative cash flow & rents decline and now they are having to pay more out of pocket to cover the mortgage, because the property is not bringing in as much rent as it was prior till declined rents.

  3. jon levine

    Nice article Sterling. Banks back in 2006-2008 were lending to anybody. Families making 75k had no business being approved for a 700k house with no money down.

    What worries me is the amount of people chasing yield , seeing people buy properties with no margin for error . Will be interesting when rates finally start going up one day.

    • David Roberts

      Yes it will, considering i have no knowledge or experience in my lifetime of rising interest rates, and neither does anyone under 40 lol.

      The last 30-35 years falling rates have driven real estate prices higher (inflation). We are close to zero. How much lower can rates really go? I dont think we can handle rising rates at this time, maybe never. But it wont stay this way forever, and if rates start rising, all those fixed loans become more valuable.

      • Justin R.

        Yes, interest rates have played a big part in that over the past 35 years. I’d argue that was driven as much be increased efficiencies in the banking system (and globalization) as anything else, which are permanent structural changes that are likely to depress rates from historical norms permanently.

        But, I’d say there’s other things contributing to driving RE prices higher that have more room to run. That includes: the establishment of the US as the primary safe haven for global capital, migration caused by the transition from manufacturing to knowledge-based economy, regional immigration patterns, increasing wealth concentration, the move to Internet-based commerce instead of brick-and-mortar, and continued increased in urban (read: limited housing supply) density.

        Not disagreeing about interest rates, just saying that an increase in rates is unlikely to bring a corresponding move in RE prices. Lots of things at play here.

  4. Jerry W.

    I find no merit at all to your claim that the banks engineered the crash to make profit. Most of the banks lost their shirts, many folded and others were propped up by the government. You had no facts or data to support your hypothesis. This article lacks credibility.

    • Mark Gilbo

      No merit? Everyone in the financial world knows the banks shorted the same system they created. They created derivatives and then ended up shorting them when they knew the system was going to crash. Then they went to the FED who went to the President for a bailout. Its all rigged and will happen again here soon. I didn’t buy one rental property the last 6 years because I’m waiting for the next crash which will be 10x bigger than 2008 and then you guys can sell your rentals to me for peanuts on the dollar. 🙂

      • Kevin Yeats

        As Sterling mentioned, READ the book “The Big Short” which goes into more detail on the workings of the financial downturn.

        Some participants benefits (tremendously) while other actors lost it all – and lots of players fell in between. An investor cannot make a position and set up a derivative against that position and have both pay off.

  5. David Roberts

    It is an election year. I would expect a heavy market selloff next tear, who knows with real estate.

    Its why Ive chose to flip. I feel its the rightb time to be flipping and the wrong time to be buying rentals, just based on my opinion of the cycle.

  6. Justin R.

    I’m with you on the general point re: the danger of over-leveraging and the need to understand the financial context that we’re all operating in at the moment. That includes interest rates, govt policy encouraging or discouraging lending, bank regulation, and others.

    For future articles, I’d encourage you to dig deeper – get away from unsupported generalizations and support specific claims with numbers and facts. These articles should be seeds for great learning and discussion (or SEO juice, if that’s the unfortunate goal) and it’s very hard to have a productive conversation about facts without having more meat on the bone.

    Much respect… Just hoping to raise the bar for all of us (my own posts and articles included!)

  7. Karen O.

    Thanks for this Sterling.
    While the banks were complicit in the housing crisis, mortgage brokers were even more so. Many of those were responsible for a good amount of the subprime lending. They were predators preying on the uninformed, the poor and especially the elderly (on this I speak from experience).
    When the max mtge to be purchased by Fannie and Freddie increased under W, these fly by nighters were falsifying data to generate loans they should have known the homeowners could not afford and pushing variable rate loans.
    I hope it doesn’t happen again, but it felt like dejavu at the end on 2015/beginning of 2016 when the gurus started up again. And no money down again became a mantra.
    It should be enough to cause concern if you’re paying attention.

  8. I found this article to be incorrect. Many banks fell during the the crisis. I am not quite sure why they would engineer their own demise. I feel this article was to quielty slip in crowd sourcing which is a business the author has an interest in.

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