What if a recession is really coming in 2019?
Rental Property Investor · Atlanta, GA · Member since 2018 · 15 posts · 24 votes
What if a recession is really coming in 2019?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7yWho cares if we are in a growth period or a recession? You need to build a business that flourishes in any environment.
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- Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes7y
I posted this in another forum that has a similar question so here it is:
The landlords who got hammered and lost their properties in 2008 were the ones who were overleveraged with rentals that were not cashflowing. When property values decrease, they have negative equity and when people lost their jobs and rents decreased/ vacancies increased, they have no choice but lose their "alligators".
As someone who survived the last recession and has bought over 1,000 units since then, the lessons are clear:
1. In the good times (when rents are high/vacancies are low/ financing is easy with low interest rates), focus on decreasing debt, increasing equity and increasing cashflow.
2. In the good times, you can also do a lot of capital gains activities like flipping and new builds. What you want to do is accumulate cash, lots of it!
3. By doing #1 and #2, when the recession hits, when landlords who didn't do #1 and #2 are cash-poor and losing their properties, that's when you BUY heavily discounted properties and further build your portfolio.
I look forward to the next recession. It's a BUYING opportunity.
- Real Estate Agent · Palm Springs, CA · Member since 2018 · 19 posts · 12 votes7y
I think this is more of a correction. There's lots of opportunity on the real estate side.
- Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes7y
Shanese and other interested readers,
I agree with many of the suggestions already given. What we are talking about in general though is risk management. Generally, the only way that we can afford a property is to leverage, in other words, to go in debt for it. And as long as a property cash flows, we think of it as doing ok and worth holding in the portfolio. The BRRRR strategy makes extensive use of this obviously. Just a warning though, it is easy to be a million or two in debt. When the economy is fine everything cash flows and life is good. But in a downturn, good people can fall on hard times and may not be able to make their rent. That makes a normally good cash-flowing property turn into a money sucker for a month or two. Advice like from @Todd Dexheimer is to have "ample reserve funds (9+months)". I have a little different perspective.
I met a guy from town who had 110 properties. So he had mortgages on some, but not all of these. When the 2008 downturn came, he had tenants who couldn't lost their jobs and couldn't make rent. He had mortgage payments to make on over 80 properties. It didn't take long for him to loose his reserve. He still had to make payroll. He had to sell most of his properties at fire-sale prices. His portfolio stabilized at 20. But he also had a full-time crew and 20 properties was not enough to maintain the wages of the crew. He had to radically redesign his business and he eventually sold even the 20 that he had.
I realized that 9 months of savings for 110 properties is more than what most people keep on-hand. I've heard all kinds of proposals including our co-host David Greene saying having equity in the property is good insurance. But I think this... having equity in your property doesn't stop the mortgage payment from being due. And the only way to not have a bank take your property is to always be able to make your payments or not have payments. My strategy is to have some percentage of my portfolio that is fully paid off. Right now it is about 75% paid off. I will be lowering it to about 50% soon to raise money for my next purchase. Paid-off properties are in a lesser risk position than the rest of my mortgaged portfolio. Selling when prices are high can be an important part of my strategy. This business is easy to get into, but many will not survive, especially the highly leveraged, if they do not handle their money well.
There are other ways of managing the risk. Having partners to share the risk is another strategy. You benefit from the income and abilities of the team and your portion of any downturn is divided by the number of people on team (assuming roughly the same financial portion).
What do you think? How do you mitigate risk?
Mark
- Rental Property Investor · Mill Creek, WA · Member since 2017 · 35 posts · 10 votes7y
@Shanese Francis
Emergency funds will cover your expenses
- Specialist · Philadelphia, PA · Member since 2018 · 3 posts · 9 votes7y
Most people don't know this, but there were 2 other recessions in the US before the 1929 crash in the 1870's and late 1890's if memory serves me right. History tends to repeat itself and the FED is struggling to gain control of the economy after letting banking run wild for a long time AND giving the top 10% a tax break they didn't need. Unfortunately, I think another recession is unavoidable in the short-term given the policy moves from Washington. It remains to be seen if policy changes can address the stresses in the marketplace.
Cardone's main principles are sound. 1. be invested in workforce housing. 2. more consolidated units, more down-side protection. 3. be careful about reliance on your sfr for equity. SF residences are sensitive to major market disruptions.
As you can see, the President is flailing to avert a downturn on his watch. Good luck!
- Investor · Meridian, ID · Member since 2018 · 86 posts · 39 votes7y
I found this interview with tom ferry and steve harney super helpful and reassuring!
https://youtu.be/ihM5mf71UYk?list=PLlnz4BpiHqRHNdT5-tdqK5MWOu4nTeq9w
- Rental Property Investor · Atlanta, GA · Member since 2017 · 221 posts · 188 votes7y@Brian Juris You got it. Its a correction by all means. I dont see what will cause a recession. Supply is still less than demand
- Wholesaler · Odenton, MD · Member since 2016 · 27 posts · 27 votes7y@Craig Curelop I completely agreed with your view
Originally posted by @Craig Curelop:
@Shanese Francis - Buy investment properties that cash flow. If the market goes up, great! If the market tanks, your cash flow will cover your mortgage and your expenses and you can hold on.
The people who purchased real estate smart in 2008, did not get burned. They are very wealthy right now. It's the people that bought personal property they could not afford, rental property that did not cash flow, or got scared and sold before the market returned.
>Buy investment properties that cash flow. If the market goes up, great! If the market tanks, your cash flow will cover your mortgage and your expenses and you can hold on.
I do not mean to single you out as I see quotes like this all the time. The GR had locales that suffered huge rent declines and huge vacancy increases. If you had great cash flow in Detroit or Las Vegas, to name just a couple of large cities, your great cash flow vanished as you could not fill vacancies for a fraction of the pre GR rents.
The GR affected different areas differently. My own market experienced virtually zero rent declines. However, there were many RE investors (some of which I know) in other markets that had great cash flow before the GR that was losing property. On top of the cities with huge rent declines there were numerous cities with more modest rent declines. A couple hundred dollar rent decline seems like a modest rent decline, but it is often the difference between cash positive and not.
One of my favorite books about buy n hold RE is something like Land Lording on Auto Pilot by Mike Butler. He had the misfortune to have Detroit as his primary market. He claimed great cash flow on his properties prior to the GR. Apparently not great enough to absorb the type of rent declines that Detroit experienced.
- 7yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
This idea that your going to recession proof your portfolio/life/bank account is foolish.
You may reseasion proof your investments in the short term, but your not going to protect yourself from everyone else’s bad choices.
When spending stops, jobs go bye-bye, and rents stop being paid no matter your market or tenant class you have. If you think otherwise, take some sounds life advice from @Jay Hinrichs posted in other threads about his recession experience even when your doing it right.
I cashed my chips January 2008 in a profound stroke of luck, walked away with millions in cash, and still did not totally escape it. Those who had the cash just keep buying time, years and years of time. Banks of all sizes where running, not lending.. everyone was running for their lives.. Can you afford 3-6 years, or more, of losing money month after month? No? Yeah... that’s what it can really look like when all hell breaks lose!
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Levi T.:
This idea that your going to recession proof your portfolio/life/bank account is foolish.
You may reseasion proof your investments in the short term, but your not going to protect yourself from everyone else’s bad choices.
When spending stops, jobs go bye-bye, and rents stop being paid no matter your market or tenant class you have. If you think otherwise, take some sounds life advice from @Jay Hinrichs posted in other threads about his recession experience even when your doing it right.
I cashed my chips January 2008 in a profound stroke of luck, walked away with millions in cash, and still did not totally escape it. Those who had the cash just keep buying time, years and years of time. Banks of all sizes where running, not lending.. everyone was running for their lives.. Can you afford 3-6 years, or more, of losing money month after month? No? Yeah... that’s what it can really look like when all hell breaks lose!
ya I wish I had gotten that memo and sold out in 06 to 07... this time around. though basically zero debt.. all equity.. granted our returns are not what they could be with leverage . I think folks who think just because they can make it 4 or 6 months with no income are in a good spot.. really don't quite understand how bad it can get .. although I am not predicting it. and I certainly don't want to live through another 08 to 2011.. to me reserves mean far more than 6 months.
- Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes7y
Originally posted by @Levi T.:
This idea that your going to recession proof your portfolio/life/bank account is foolish.
You may reseasion proof your investments in the short term, but your not going to protect yourself from everyone else’s bad choices.
When spending stops, jobs go bye-bye, and rents stop being paid no matter your market or tenant class you have. If you think otherwise, take some sounds life advice from @Jay Hinrichs posted in other threads about his recession experience even when your doing it right.
I cashed my chips January 2008 in a profound stroke of luck, walked away with millions in cash, and still did not totally escape it. Those who had the cash just keep buying time, years and years of time. Banks of all sizes where running, not lending.. everyone was running for their lives.. Can you afford 3-6 years, or more, of losing money month after month? No? Yeah... that’s what it can really look like when all hell breaks lose!
Doesn't the ability to survive a recession depend on the scenario one is preparing for?
The reason I'm asking is when I was younger, with little to lose and little in the way of cushion, I struggled to get to the point where I could survive the "5-year flood" (a couple of years of slower times, which is the normal business cycle in a healthy economy). Then when I got to the point of having more money on the line, I became concerned about the "50-year flood" (slow times lasting much longer than a couple of years). Now I'm thinking about the "500-year flood" (Great Depression 2.0, or worse).
I know that no matter how much I prepare, there will always be a scenario that will overwhelm me.
The other thing I've realized is the scenario no one expects is the one that bites the most. For example, the Great Depression wasn't supposed to happen in an advanced industrialized economy, yet it did and I'm not sure we really know why even to this day. Slow times are supposed to be deflationary, but then came the 1970s where the economy slowed but inflation soared. This "stagflation" took everyone by surprise (even the economists). The Financial Crisis of 2008 was at first supposed to be a problem only with the subprime market (so said the chair of the Federal Reserve), yet it got out of control and did a lot of damage to people's lives.
There are also good surprises. The Internet changed how we work and play, yet no one saw it coming.
- 7yLevi T.Pro MemberRental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
Originally posted by @Account Closed:
Originally posted by @Levi T.:
This idea that your going to recession proof your portfolio/life/bank account is foolish.
You may reseasion proof your investments in the short term, but your not going to protect yourself from everyone else’s bad choices.
When spending stops, jobs go bye-bye, and rents stop being paid no matter your market or tenant class you have. If you think otherwise, take some sounds life advice from @Jay Hinrichs posted in other threads about his recession experience even when your doing it right.
I cashed my chips January 2008 in a profound stroke of luck, walked away with millions in cash, and still did not totally escape it. Those who had the cash just keep buying time, years and years of time. Banks of all sizes where running, not lending.. everyone was running for their lives.. Can you afford 3-6 years, or more, of losing money month after month? No? Yeah... that’s what it can really look like when all hell breaks lose!
Doesn't the ability to survive a recession depend on the scenario one is preparing for?
The reason I'm asking is when I was younger, with little to lose and little in the way of cushion, I struggled to get to the point where I could survive the "5-year flood" (a couple of years of slower times, which is the normal business cycle in a healthy economy). Then when I got to the point of having more money on the line, I became concerned about the "50-year flood" (slow times lasting much longer than a couple of years). Now I'm thinking about the "500-year flood" (Great Depression 2.0, or worse).
I know that no matter how much I prepare, there will always be a scenario that will overwhelm me.
The other thing I've realized is the scenario no one expects is the one that bites the most. For example, the Great Depression wasn't supposed to happen in an advanced industrialized economy, yet it did and I'm not sure we really know why even to this day. Slow times are supposed to be deflationary, but then came the 1970s where the economy slowed but inflation soared. This "stagflation" took everyone by surprise (even the economists). The Financial Crisis of 2008 was at first supposed to be a problem only with the subprime market (so said the chair of the Federal Reserve), yet it got out of control and did a lot of damage to people's lives.
There are also good surprises. The Internet changed how we work and play, yet no one saw it coming.
No, seen or unseen is not the problem of a recession, or depression. It is an economic failer of our financial systems in the modern world. You have 26% chance per year of having a 100 year catastrophic event. It’s like a house or cards, it all works well till they all start falling. No one can stand on their own, they can only stand all together. We are all just one card in a stack of cards when a failer happens.
Typed with Siri while cycling. Sorry for any typos
- Specialist · Baltimore, MD · Member since 2016 · 388 posts · 318 votes7y
Stop listening to the talking heads on tv! They know nothing. Absolutely nothing. But they have a 50/50 shot of being right. If they are right, they tout themselves as an oracle and the media plays them up to be that. The attention drives more revenue and market share to them and their companies.
If they are wrong, no one bats an eyelash and reverts to, "well, these things are extremely complicated and difficult to predict with any certainty."
It's a no-lose bet for these guys.
This is actually comical because many RE investors tout they invest in RE because the stock market is unpredictable and moves seemingly without rhyme or reason, but as soon as the media reports on a possible recession and cites a stock market selloff as the indicator, those same RE investors start questioning if we are in fact heading for a recession.
If you want to get a better indication of where your local market is, have your agent provide you the previous 1, 3 and 5 year metrics on houses bought/sold, avg days on market, median price and ratio of ask to sale price to start. Your agent should at least have this basic information readily available. If your agent doesn't have that information, you should consider getting a better one. Good agents will have a lot more data to chew on and comparisons year over year for similar time frames. You should also read the statistics fannie mae puts out. That will get you a much better start to understanding where your market is than reading the sensationalized b.s. the talking heads would have you believe.
And as a general rule, you should ALWAYS be prepared for a recession/market downturn by having CASH reserves to get through tough times because at the end of the day, cash is still king.
As others have stated above, I don't believe over leveraging will have as much of an impact during a recession as not having adequate reserves will. Another thing to keep in mind: If you buy your properties correctly in the first place you will suffer less during a recession as the majority. Buy a property for cash flow rather than for appreciation, have some emergency funds for vacancies, repairs, etc. and recessions won't affect you nearly as much.
Have cash and manage your place closely. A recession will come, we will all see many more, who knows when, but since you asked the question, good work, and start preparing now
and I agree about overleveraging - don't do it. People stretch themselves and don't have proper cash reserves. Overleveraging and cash reserves... you can't have one in the presence of the other.
You need cash reserves and good management. If your tenants are good but hit rough road, you'll be there to work with them to keep them in a home and your building occupied with no turnover
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes7y
@Shanese Francis
Wait. Do not buy right now.
If the stock market keeps bleeding, that will eventually translate into layoffs and people abandoning their home.
Keep an eye on the Preforeclosure and foreclosure rate.
Prepare to buy when REO hits the market.
- Rental Property Investor · Martinsburg, WV · Member since 2017 · 111 posts · 81 votes7y@Shanese Francis I'm new at this, but I try to position myself in the market so that I'm excited for a recession. All of that is to say that I try to never overextend myself and find deals that make enough sense that even with a downturn, I don't feel the hurt in my W2. I postulate lower rents for worst case scenarios and if it still makes sense, it makes sense. I'm buy and hold. Should have led with that.
@Shanese Francis
I recommend to always know what your doing in case that happens.
but avoiding taking action it’s not an option.
things can always happens,we can’t let unknowns backing us off in life .
and what the hell will happen in 2019,it’s a big unknown.
@Charles Kao what asset classes are you now investing in?
- Investor · Phoenix, AZ · Member since 2015 · 485 posts · 384 votes7y
@Shanese Francis
Taking into account the fact that I’m a biased commercial multifamily investor, I would advise to think bigger to speed up your scaling strategy. 2 or 29 units - it’s the same work.
Generally, buy low, focus on a cashflow strategy that will work no matter the economy. Never count on appreciation. Up and downs are roughly predictable, just like the current up, when you look at history. It’s just nobody can exactly predict when the tipping point is reached and the roller coaster starts heading down - unstoppably.
Somewhere in the down trend is the time to buy at heavy discounts. But that’s a bit down the road.
“Patience young Luke.” - Yoda
Too many people purchase when the market is already too high and prices climb even more due to greed and lack of education. Don’t ignore the signals. They are evident everywhere.
It’s time to hold back and hold on to what you’ve got. Or make ridicloulos offers that really pencil out. If the owners doesn’t want to sell, let them go, they will either sell to the next greater fool or come back crying to you in a few months from now.
In the meantime start working on attracting private capital investors to be much better prepared when it comes time to go shopping.
“Dig your well before your thirsty.”
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
Here is the thing about a recession. No one knows how it will affect housing. Look at the dot-com bubble that burst 99-01. In my area prices actually went up during that period.
Also some information I want to touch on.
NO, you do not want to buy Puts as a hedge. Unless you work for a hedge fund and have a Quantitative analyst from MIT working for you. This strategy is very difficult and requires a high level of skills. Puts have an expiration date to them. The time decay will kill you if you don't know what you are doing. Anyone who has traded puts know the difficulty of this.
As for REOs and foreclosures. I just don't see people abandoning their homes even with job layoffs. On this bullish run in prices, most buyers were putting 20% down unlike the 100% finance loans of 04-08. Why would a buyer leave their house if they have equity? Make zero sense. Now I can see a slow decline in prices but each area is different. In my area. I see a ton of buyers I know sitting on the sidelines wanting to buy at different price levels. Could those buyers be gone if the market turns? Yes. As of now, I see a lot of demand at different price levels. The foreclosure process is very long. At least in CA.
I do see some people getting exposed should a recession happen. There is no free lunch in this world and the easy money has passed. Some people will get their hands caught in the cookie jar.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes7y
If you've been following the financial news, you know that the "next recession" is already here. "The worst December since the Great Depression" cannot be a harbinger of anything else.
Pay attention to what's happening in your local markets and start master-minding about your next course(s) of action.
- 7yMatt PojanowskiPro MemberWoodville, WI · Member since 2018 · 8 posts · 2 votes
@Shanese Francis This concerns me too as I am looking at buying a duplex as possibly house hacking as well. I may have found a private investor, however, to put up half and rent both units out. What precautions can be taken to hedge against recession, if it does happen?
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