What if a recession is really coming in 2019?

Rental Property Investor · Atlanta, GA · Member since 2018 · 15 posts · 24 votes

With the stock market ending their worst quarter since 2008, there has been much talk about a recession in the near future. I understand that recessions are highly unpredictable, no matter how much research is put into place. Are there any precautions being taken by advanced REI to navigate in this uncertain economy? Is there anyone who was investing during our last recession, what were some strategies you put in place to secure your ROIs?

BTW: I'm a new investor looking to buy a duplex and house-hack! I'm currently in my learning stages.

Another Warning That A 2019 Recession Is Coming

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

Who 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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Account Closed
Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
7y
Originally posted by @Frank Wong:

. . . As for REOs and foreclosures. I just don't see people abandoning their homes even with job layoffs. . . .
I knew someone who lost her job as a software engineer after the dot-com bubble burst and wasn't able to find another one (the job market shrank quite a bit after the venture capitalists scaled back). She kept refinancing the home for a few years to pull out the additional equity from FMV appreciation to pay her living expenses. Then just before for housing market started to roll over in late 2006, her bank refused to let her refinance yet again and she was forced to sell.
Regardless of the equity they have in their homes, when too many motivated sellers enter the market because of layoffs in the area, house prices come under pressure. Those on the sidelines with cash can scoop up bargains because it's a buyer's market, but knowing when the market has "hit bottom" can be a tricky proposition. Landlords need both low house prices and employed tenants to pay the rent.
Rents also come under pressure when the job market shrinks. During the dot-com bubble, I knew of people who were so busy writing code they had to hire an apartment finder because they didn't have time to look for one themselves (they were living in a hotel room after moving to the area to start their new job). After the bubble popped, many apartment buildings started displaying their balloons by the curb again because they had vacancies to fill as workers moved away from the area.
The dot-com bubble was an extreme example that affected mostly the San Francisco Bay Area (no more venture capital funding) and the financial district of New York City (no more IPOs for Wall Street underwriters to bring to market). The Financial Crisis of 2008, on the other hand, impacted the entire United States and had ripple effects that were felt around the globe.
The next major downturn, whenever it happens, will be different from previous downturns and will likely be caused by something we can't even conceive of yet. The dot-com era was the new economy paradigm that ended up changing the world, but many IPO investors lost money. The Financial Crisis of 2008 was triggered by exotic-but-toxic financial derivatives no one could understand.
The takeaway lesson I learned is to make my investments based on the needs of my household budget. For example, I bought my REITs in the early 2000s because I wanted the 6% yield at the time. I sold these REITs in the late 2000s because I wanted the cash to cover my living expenses. The fact the REITs had appreciated during the time I owned them was due to luck and not genius.
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Ryan D.
Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes
7y
Admit what you do not know. You have no clue if a recession is coming and neither do I. I trade the stock market full-time and firmly believe in timing equity markets. As for real estate, ha! No thanks. This is a long term game here. If you want to play short term go trade stocks.
Unless you are flipping, a recession should be something you should be excited for. Buy $SPY puts and go buy a property that you can value add, be levered at 75% equity and cash flow after accounting for capEx, vacancies & property management. Then rent it, refinance it and go do it again.
0 Reply
Tony F.
Investor · California, CA · Member since 2016 · 117 posts · 26 votes
7y
@Daulton H.
Can we quantify or harden up “don’t over leverage”? This is the key to not losing your *** in a down turn it seems like, just looking to hear other people’s thoughts on this more then specific %s...
0 Reply
Courtney Dillard
GA · Member since 2016 · 7 posts · 8 votes
7y
OP I would wait on the house hack at least til the spring. I think prices are stupid in our area of the country right now. Are far as the resession goes, I’ve been building a war chest by refinancing my current rentals to the point where they still cash flow but I can obtain an ample amount of cash.
0 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
7y
@Shanese Francis buy more rentals, who cares if things go up or down, 10 - 15% you still get a rent check, things always come back. Its all about cash flow,
Good luck
1 Reply
Daulton H.
Rental Property Investor · SC · Member since 2017 · 37 posts · 35 votes
7y
@Tony F. I have thus far not leverage anything beyond 70%. That amount of mortgage cash flows on the deals I buy. I also look at what FHA considers as an appropriate risk in underwriting investments (80% leverage). So the banks feel safe (even hard money) in loaning up to 70-80% of value. I'm assuming they know more than I do. If you have a decent buffer between the rent you collect in today's market and the PITI payment you will be well served. That exact number will be different for every market and no one can predict what a downturn would mean for rent rolls. If possible screen for tenants who are employed in recession-proof jobs, medical fields etc.
0 Reply
Matt Soffer
Blue Bell, PA · Member since 2016 · 4 posts · 2 votes
7y
@Shanese Francis
Buy for cash flow, and if you are a buy and hold investor in B and C level areas, market fluctuations won’t dramatically change rents in these levels most likely. And make sure you have reserves for potentially sightly higher vacancy rates.
2 Reply
Amy A.
Portland, ME · Member since 2012 · 616 posts · 550 votes
7y
Since you want input from those who survived a recession, I'll tell you that I thrived during the last recession. When I bought multi-units, I listened to my own calculations and not to the real estate agents who told me that "cap rate doesn't matter" or to buy for appreciation, not cash flow. When I started flipping properties, I listened to my calculations and not to my friends, who thought I was crazy to buy houses (price your flip to be the best finished product on the market in that price range and it will sell). The bottom line is to stick to the fundamentals when everybody else is acting irrationally and you should be okay.
We also must consider inflation during a recession. We didn't see inflation in the last one, but it's pretty common to have high inflation during recessions. The value of the cash we're hoarding to buy the good deals that come along during a recession could be eroded by inflation. Government numbers don't say we have high inflation, but kids in high school are making $11 per hour working in fast food jobs, bad handymen are getting $45 per hour (and are in high demand), and I just paid $7 for a tube of toothpaste... I don't have the answer, but I'm putting the issue out there.
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Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@Russell Gronsky best advice thus far. Risk mitigation is accomplished in the way you describe. Through careful analysis, utilizing/ leveraging your agent. Still you’ll need to move quickly and not reach a state of analysis paralysis. Lock up the property quickly do you due diligence using your own inspectors and contractor to estimate repair costs based on the inspection. You can’t time the market. Instead stick to your fundamentals.
1 Reply
Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@David Song great advice. I remember looking for investment properties in 2004-08. Many were buying properties in anticipation of appreciation. I just couldn’t find a deal that worked. Then the market began to decline. I waited and watched as prices dropped. My employment had stabilized and my income had risen substantially. I had the means (down payment) and credit score to secure funding. So, I continued the hunt. I spent many weekends weeding through properties and narrowing the list. Eventually I had an offer on a foreclosure and it was a home run. I only wish that I had more money for down payments or the knowledge about alternative funding sources. So, if the recession were to happen again, have some cash and a network of partners for additional funding at your disposal.
0 Reply
Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@Ken Breeze I agree. Like you said, keep making offers that make sense to you even if the are well below what the owner will accept. It’s great practice.
1 Reply
Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
We are in the middle of the cycle turn imo.
0 Reply
Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
Originally posted by @Mary K.:

@Charles Kao what asset classes are you now investing in?
Focusing on storage facilities and mobile home parks. I have started evaluating Commercial NNN Tenant deals as well, but the intention is to just increase my familiarity.
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Kyle Calica
San Francisco, CA · Member since 2016 · 27 posts · 7 votes
7y
I keep seeing the words "over-leveraged" meaning you bought for a low downpayment, correct?
Say if I'm house hacking and bought for a low downpayment, how will being "over-leveraged" screw me?
Is it only job uncertainty in my renters, and my own, which can hurt me financially?
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Account Closed
Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
7y
Originally posted by @Kyle Calica:

I keep seeing the words "over-leveraged" meaning you bought for a low downpayment, correct?
Say if I'm house hacking and bought for a low downpayment, how will being "over-leveraged" screw me?
Is it only job uncertainty in my renters, and my own, which can hurt me financially?
"Over leveraged" means you owe so much money that you cannot comfortably afford to make your loan payments every month. If something comes up and you need to borrow more money, you'll be turned down by the bank. If you lose your job (or tenant), any rainy day savings you have will not last as long (it takes time to find another job or tenant).
How much debt is too much debt is determined by your bank and should also be dictated by your own common sense. If the economy goes into recession and unemployment increases, how will you pay your bills?
2 Reply
Account Closed
Las Vegas, NV · Member since 2018 · 100 posts · 140 votes
7y
A bank manager will lend you his umbrella, but will want it back the minute it starts raining.....
6 Reply
Account Closed
Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
7y
If you owe the bank $100, you have a problem. If you owe the bank a million dollars, your bank has a problem. The wise bankers will not let you borrow a million dollars.
3 Reply
Account Closed
Las Vegas, NV · Member since 2018 · 100 posts · 140 votes
7y
@Roger Steciak that saying always makes me grin....
1 Reply
Kyle Calica
San Francisco, CA · Member since 2016 · 27 posts · 7 votes
7y
Originally posted by @Account Closed:

If you owe the bank $100, you have a problem. If you owe the bank a million dollars, your bank has a problem. The wise bankers will not let you borrow a million dollars.
Haha! I love this! I'm explaining to some of my friends why I'd rather take out a bigger loan to get a multi-unit rather than purchase a SFH with 20% down in the Bay Area.
Okay, so over-leverage is not borrowing from the bank too much - it's paying it back at such a fat payment which you can't afford.
So if I'm house hacking and pick stable tenants - and have a decent job which I can still pay my mortgage, then that's fine and I'm not over-leveraged?
1 Reply
Kath Marie
Developer · Chicago, IL · Member since 2018 · 52 posts · 105 votes
7y
No recession. Dow up 1,000+ points. LOL.
This thread can now be closed....
Tomorrow, or in a few days, on the next dip we can open it back up for discussion!
3 Reply
Account Closed
Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
7y
Only you can decide if you are over-leveraged or not (and your bank, if you get turned down for a loan -- that happened to me once). You can't argue with success.
1 Reply
Kyle Calica
San Francisco, CA · Member since 2016 · 27 posts · 7 votes
7y
@Account Closed
yeah, makes more sense now. I think I'll be good then, I'm fine with giving a low downpayment (probably FHA but I also got approved for a small down payment on a conventional loan too) and leveraging the bank for a multi I want. But I'll definitely be smart about it and not ask for more than I need. Thanks for the knowledge!
1 Reply
Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
7y
Originally posted by @Account Closed:
If you owe the bank $100, you have a problem. If you owe the bank a million dollars, your bank has a problem. The wise bankers will not let you borrow a million dollars.
NOT if the bank lends you $1M on property worth $2M :-)
2 Reply
Russell Gronsky
Specialist · Baltimore, MD · Member since 2016 · 388 posts · 318 votes
7y
The DOW just rallied 1,000+ points today. We are surely back into a booming economy again, right ?!?!?! No more recession concerns? hahahahahahahaha
2 Reply
Tim Johnson
Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
7y
I'm a custom home builder and I 100% believe a recession is coming, all spring, summer I would get 3-4 calls a week about building new homes, the phone has stopped. Now only getting 1 or 2 a month.
4 Reply

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