9 Ways to Survive (and Thrive) During the Next Market Crash

by | BiggerPockets.com

Interest rates have been rising. Single family residence prices are softening. Does that mean we’re headed for a downturn?

Well, sure—at some point.

Recessions have been around forever—they’re an unavoidable part of the investing landscape. But you don’t need to fear them. You can prepare for, and even thrive, during a recession if you have the right tools and strategies.

This is the story of my first recession. As recessions go, it was a doozy.

Getting Started

Throughout the 2000s, I was pumping every dollar I earned into value-add multifamilies in up-and-coming neighborhoods in Los Angeles, like Koreatown and Hollywood. I loved it. I was a multifamily evangelist.

But by 2006, nothing seemed to make sense, and, like a lot of investors, I was anticipating a downturn.

That’s right—the correction didn’t come out of the blue. The warning signs were everywhere. Reckless lending practices combined with the irrational exuberance of the market had most sensible investors cowering for what was to come.

I stopped buying in 2006, waiting for the inevitable correction. I’d be ready to jump in, lock in discounted “correction pricing” before values once again reverted to their upward, long-term trajectory.

Timing the Market

It came in early 2008. Prices slid 10%, then started to tick back upward. This was my chance, and I jumped in. I found a C+ class multifamily property with cashflow and value-add. The sellers were suing each other and were motivated to sell. It was a great deal.

And pretty sweet market timing on my part. Right?

Not exactly. It turned out that this 10% decline wasn’t the end of the correction, it was just the beginning. That tick back upwards in values? It was caused by investors like me, waiting on the sidelines to jump in after a correction. We all jumped in, and it caused an uptick.

But we were still at the top of the waterfall.

A Seductive Temptress

I’ve read that this is a common occurrence during recessions. There’s a portion of investors anticipating a downturn, who wait on the sidelines, ready to jump in once prices correct. After a 5-10% decline, the first wave of side-liners jumps in to lock in the discount. This wave of buyers results in a slight uptick in the market. The uptick is misinterpreted by the rest of the sideline investors as the correction being over, and they rush in so as not to miss it! But the reality is that the crash has just begun. And they all go over the waterfall.

They call it the seductive temptress of a market crash. It takes down the foolish investors, but seduces otherwise smart ones as well. Cruel—but kinda funny, right?

I was one of those idiots.

To make matters worse, I’d convinced some work colleagues to invest with me. We bought with confidence, feeling good about our price. But then Lehman Brothers collapsed—and along with it, our entire economy and real estate market. We entered the worst real estate crash in the last 50 years.

It was Armageddon.

My greatest dread was losing my colleagues’ money. (I would much rather lose my own money than to have people trust me, then blow it.)

A Resilient Asset Class

As real estate news got more and more grim—mass foreclosures, investors walking away from properties—something strange was happening at our C+ class building. Rents were actually inching upward.

Renters in higher-end properties were facing layoffs and salary cuts, causing them to move into more affordable, mid-tier units, like ours. And former homeowners were becoming renters. During the recession, demand for this asset class actually increased.

The recession was nerve-racking, but fortunately, we survived. I was able to deliver my work colleagues triple their money (crushing the stock market returns during the same period). I felt more relief than triumph.

9 Takeaways From the Great Recession

The experience taught me a lot about recession-resilient investing. I’d completely mistimed the market, but was saved by other factors—some that were part of my strategy, others accidental.

Here are strategies I now use to invest with confidence in any market:

1. Stick with B and C-class properties.

I have no problem buying A-class buildings at the beginning of a recovery—when I can buy them cheap. In late stages of a real estate boom, they’re overpriced and I avoid them like the plague. I also avoid turnkey. The high end of the market is the first to get slaughtered in a bad downturn. I aim squarely for mid-tier properties I can improve!

2. Multifamily is resilient.

Recessions tend to create renters, so multifamily tends to be resilient during downturns. From 2008-2012, 8 million single-family homes went into foreclosure. During the same time, multifamily default rates were less than 1%.

3. Buy as cheaply as possible.

The saying goes, “You make your money when you buy.” If you want to overpay, do so at the beginning of a market recovery. But not now. Prices are high, but deals still exist. Be patient. Make sure you’ve got that cushion that will allow you to absorb declines in value that could wreck other investors. Learn how to negotiate. Battle for the best price possible.

Related: The 5-Point Real Estate Market Crash Survival Guide

4. Cash flow is a must.

Late in a real estate cycle, positive cash flow is a must. I make sure the buildings I buy generate income from day one. An added benefit of this is that you get a better loan-to-value. Bonus! An adjunct to this is: Don’t over-leverage. Only borrow what the property’s cashflow will cover.

5. Buy in an up-and-coming neighborhood.

Even during a downturn, submarkets are evolving. Some evolve in response to the downturn—renters move out of pricier areas into nearby, more affordable neighborhoods and then make them cool! This lead to the birth of neighborhoods like Silver Lake, in LA, a neighborhood that is downright posh now. Catch neighborhoods on the rise.

6. Beware of oversupply.

Another saying goes, “Most real estate booms die from oversupply.” Keep this in mind. Supply and demand is a basic fundamental of investing. Overbuilding is a growing concern in several markets, especially at the high end of the market. Track your metro’s supply/demand stats, absorption rates, etc., so you don’t get caught.

7. Add value.

This is a must for me in any economy. If you can reduce expenses or increasing cashflow with strategic renovations, you are increasing the value regardless of the economy. So you don’t really need to worry about it. It’s another layer of cushion.

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Related: 5 Ways I’m Still Finding Deals in Today’s Real Estate Market

8. Have cash reserves.

This is basic common sense and key during any stage of a market cycle. The reality is your expense projections will usually be too low. Be prepared with reserves.

9. Don’t try to time it.

I tried to time the market and failed. Market cycles are predictable, but the timing of them is not. Our economy is too complex to know the event that will trigger the investor fear and cause a recession.

I’m sure I missed something. What are your strategies to weather the next downturn?

Comment below!

About Author

Mark Hentemann

Mark is a real estate investor and syndicator in Los Angeles. He bought his first duplex in 2000 as a hedge against the uncertainties of an entertainment career. After 18 years, he’s grown his RE side-hustle into Quantum Capital, a company with $55m in Los Angeles multifamily assets. He’s also an Emmy-nominated writer/producer, creating shows for Fox and MTV, and writing for David Letterman and ‘Family Guy’ (former showrunner). His mission is to help people achieve financial stability and freedom through real estate investing so they don’t have to become television writers.

34 Comments

  1. Mark Khuri

    Great summary Mark! We recently launched a Recession Resistant Fund and over 40% of the portfolio is allocated in stabilized workforce apartment communities which also have a strong value-add upside, so your article was well received!

  2. Paul Warren

    Great article! I’ve been investing in Portland, OR for over a decade now. There are thousands of new multi-fam units about to be put online, even though we already have a glut of other brand-new, unoccupied units. Crossing my fingers that rents don’t plummet, though they are already dropping.

    • Mark Hentemann

      Hey David, a few other things that can have an impact on prices :
      -rising interest rates have an effect, because net cashflow goes down as the cost of debt goes up.
      -Investor sentiment plays a role — if there’s widespread fear or uncertainty, cap rates will be impacted.
      -In your specific market, job, wage and population growth or declines will affect values.
      -There are others… but supply has a direct impact on rents, whether its oversupply or undersupply.

      Thanks for the comment!

  3. Amanda Gant

    Very timely, as we here in Washington are very affected by this government shutdown. The recession to follow will be important. Everyone, watch out for the HUD payments (HCVP, Section 8) that may come to a stop this Feb-April…

  4. Kat McLead

    Mark, This was a very informative article especially since I live in the Los Angeles area. This is the first time we have too much money sitting around with nothing to invest it in. It’s so tempting to plunk it in some overpriced multifamily, but my real estate agent (also an investor) said to sit on the side lines. Your article confirms it. I won’t be the over eager investor that rides the waterfall down ( I hope). Thank you for taking the time to write this. I’ve been nervous about C class, and considered a turn key. After reading this article, I will NOT be doing a turnkey this year. (My goal for 2019 was to buy our first rental property, but I might have to be patient.)

    • Mark Hentemann

      Hey Kat, that sounds like a good strategy — to be patient and picky. And my experience is B & C class properties more recession-resistant, and no harder to manage than any other tier of the market, especially if you have a management company. Thanks for the comment!

  5. Mike G.

    Mark, great info here about the market cycles and your story of how you navigated and got caught up in the latest one and survived and thrived by sub cycles that were a byproduct of the crash. Really good article thank you so much.

  6. Jay Harris

    Hi, Mark. You forgot one more:

    #10. Make sure you have a solid woman in your corner (wife, girlfriend, significant other, etc.) who is your second pair of eyes, and who won’t leave once things tighten up, or you lose it. Ha!

    Sidenote – This hasn’t happened to me. ?? Strongly written set of real estate commandments.

  7. Steve Hiltabiddle

    Hi Mark, As someone new to REI but not new to paper asset investing (so I have an eye on the economy), this is a great perspective on how corrections might influence RE. I also love that you recognized the ‘dead cat bounce’ where those on the side-lines jump in and influence a short term correction to only go over the falls with the rest of the market. Thanks.

  8. William Hwang

    Hi Mark,

    Very informative article – thank you for sharing! Regarding your comment “renters move out of pricier areas into nearby, more affordable neighborhoods and then make them cool! This lead to the birth of neighborhoods like Silver Lake, in LA, a neighborhood that is downright posh now. Catch neighborhoods on the rise.” I do agree!
    I’m very interested to invest in East Hollywood. It is Silver Lake and Koreatown adjacent and relatively a more affordable neighborhood. I’m hoping to invest before it becomes “Posh” like Silver Lake. What are your thoughts about this neighborhood?

    • Mark Hentemann

      Hey William, yes, I agree with you about East Hollywood — it’s headed in the direction of Silver Lake. I have a couple buildings there. Any neighborhood like that — where you’re surrounded on all sides by better neighborhoods — feels like a solid place to invest in a growing city with no room to build and a lack of supply. Good luck and thanks for the comment!

  9. John Murray

    I have survived many recessions, Black Mondays and all the good times. I’m a multimillionaire and here is my advise. Government regulation is the key to becoming wealthy. What is happening today in the US is very similar to what transpired during the years prior to Prohibition. Immigration drove fear into middle America, the fear of change in the demographic. The Law Makers, the Courts and the Executive branches are reacting to the changes and the fears. We have modern day Robber Barons that control the political process. Recessive taxation and instilling insecurities in workers. Increased prison populations and the profits from tough on crime. Since the late 1970s pro corporation legislation has decreased the average American net worth and redistributed to the top 1%. Now you just have to figure out how to use the system in place to become wealthy.

    • Davido Davido

      Thank you Mark! To me your article was clear and well written. Your first and 2nd points were of particular interest because the greater price stability of B & C properties and the greater rent resiliency of multi-family is much less obvious than the points. Mark, in case you’re interested, I’d advise that your point #9 is poorly worded “Don’t try to time the market”? -Of course we are all going to try, and we should. Perhaps the point is better made by saying “Don’t count on timing the market.” Doubtless, we ought to hedge the riskiest bets in our business. Thank you for your advice.

  10. Davido Davido

    Thank you Mark! Your article was clear and well written. Your 1st and 2nd points were of particular interest because the greater price stability of B & C properties and the greater rent resiliency of multi-family is much less obvious than other points. Mark, in case you’re interested, I’d suggest that your point #9 is poorly worded.

    It reads, “Don’t try to time the market”? -But of course we are all going to try, and we should. Perhaps the point is better made by saying “Don’t count on timing the market.” Doubtless, we ought to hedge investments based on market timing. Market timing may be the riskiest part of a Real Estate business. Thank you for your advice.

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