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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148 Replies
- 7yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I look at real estate like the stock market. It’s impossible to time it..no matter how much all the experts on here act like they know. But if you dollar cost average real estate over the years, you’ll be just fine. So I slowly buy properties in good times or bad. It all works out over time. I know a few people who said real estate was way over priced in 2015 and they were waiting on the sidelines for the next recession to buy. I’m glad I didn’t listen to their advice to wait back then! I kept slowly buying and all my property values have sky rocketed.
- Member since 2018 · 83 posts · 66 votes7y
@Shanese Francis going to echo @Ken Breeze... focus on deals that cash flow well, and keep enough cash reserves to cover 6 months to a year in case you need to cover between tenants. If the property cash flows, you don’t need to worry about the recession... when lending tightens, fewer people can buy homes, so they need to rent. A good property in a good location will stay occupied.
@Dennis M. this is the most leveraged Americans have ever been.
https://www.google.com/amp/s/www.marketplace.org/amp/2018/11/20/economy/household-debt-all-time-high-holiday-spending-season-arrives
We have short memories and are inherently irresponsible.
Originally posted by @Nate Bell:
@Dennis M. this is the most leveraged Americans have ever been.
https://www.google.com/amp/s/www.marketplace.org/amp/2018/11/20/economy/household-debt-all-time-high-holiday-spending-season-arrives
We have short memories and are inherently irresponsible.
I’d agree but We also have the lowest unemployment the highest amount of new jobs and record growth . I also agree we haven’t learned much as a society . Let’s hooe when it comes it’s short and not as painful as some of the recent ones we’ve had
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes7y@Shanese Francis If another recession like ‘08 hit, that would be brutal for many who bought at these prices. Once everyone started forclosing, it spread and people didn’t want to be paying insane $ while others were getting in way lower so everyone foreclosed where I lived in South CA. Foreclosure signs were everywhere! Maybe the market would be slower to bounce back because people might start to question whether the prices belong up, or down. However you look at it, you just have to do your best with what you got. “If” there was a recession in 2019, like your question posed, then I would gain as much RE intelligence and connections before that as possible because recession spells opportunity for the RE intelligent investors (or lucky investors).
- 7yKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
Make sure you only invest in good cash flowing properties. No speculation. No counting on appreciation. Bank 6 months of expenses to cover any downturn. There is no guarantee on anything. I would stay away from high end fix n flips. Make sure the fix n flips can be converted into a rental if the buyers are gone. The interest rates have risen from a year ago. Your pool of buyers has been reduced.
Be careful.
- Rental Property Investor · Greensboro / High point / Kernersville NC · Member since 2016 · 17 posts · 30 votes7y
@Shanese Francis
I lived in Orlando from 1988 until 2007 leading up to the last real estate crash. The property values remained flat until around 2003 and then property values skyrocketed. I was just starting to buy rental properties but could not justify the escalating prices. I had friends flipping properties and doubling their money with each new deal. There was a frenzy in the market that you needed to buy or be left behind.
I decided the escalating values did not make sense financially, the average household income was still flat but the average house price doubled in a few years. I decided it was not a good market and did not buy any properties, thankfully. In Orlando, house prices dropped 40-50% in some cases because the market was not sustainable.
As a buy and hold investor, I prefer to invest in linear markets where property values track the household income without major changes. If home prices are increasing faster than the household income, it is not a sustainable market. Low interest rates and low supply has caused markets to overheat again but the income growth in the area must be able to sustain the growth.
For rental properties, we use 40x rent and determine if the family income of the area can support the property. Example: $1250 rent requires $50,000 family income. For my focus area, the median family income is $41k to $51k and we target rents between $1000 to $1350. This insures we stay in the average of the market and should be able to adjust if we have a recession.
Even with a recession, if you buy properties that track the household income and do not over leverage, it should be a safe investment.
Looking back at my experience in Orlando area, investors over leveraged and over paid for a market that was not sustainable for the long term.
- Member since 2018 · 5 posts · 3 votes7y
@Shanese Francis
I think that if this happens as investors this will be the time to capitalize on opportunities! Remember when a recession happens most will hoard and keep their money while opportunities arise. What would of cost high dollar at the peak of the economy will lower during the down turn! Hence allowing for opportunities! Take bitcoin for example everyone is jumping in at the peak now that it down turned and it’s at low not many are jumping in on the low price. This is just a personal opinion that I have grasped on after research during the downturn!
- Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes7y
Crises create opportunities. Whether the market melts down, melts up, or oozes sideways, there's likely to be something available to do that can improve your long-term net worth.
In the area of stocks, for example, I had a retirement account (Traditional IRA) that was worth $X at the end of 2007. I looked into rolling it into a taxfree-forever Roth IRA (a taxable event), but I couldn't afford the taxes without borrowing money. I decided to leave it as a Traditional IRA and pay the taxes as I started withdrawing the money (required minimum distributions) at age 70. It was a high class problem to have.
Then a year later in late 2008, the stock market is melting down. Major Wall Street firms have failed, others are teetering on the brink, companies are laying off workers in droves, Bernie Madoff has turned himself in, and I'm excited. My retirement account is now worth only $0.5X and I can finally afford the rollover taxes without borrowing money. I got off for 50 cents on the dollar in terms of the taxes I had to pay. Today, that portfolio is worth over $2X with no RMDs or taxes to pay.
My takeaway conclusion is always remain aware of my options under various market scenarios. For example, many sellers become highly motivated when they need to convert their assets into cash on a tight time schedule. They need someone to be on the other side of their transaction as the buyer. The legendary investor John Templeton, for example, saw his role as providing a public service (of sort) by buying at the point of maximum pessimism. He wanted to help others get the cash they needed to raise in a hurry (margin calls, sheriff sales, whatever). There are no bad assets, only bad prices.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes7y
Didn't read all of this. My thought is if you are just starting at the top end of a cycle with limited knowledge and experience that can be a dangerous way to go ESPECIALLY if you view the investment as a springing platform to more properties or to live off of the cash flow.
In the last downturn start of 2007 -2009 the herds were the ones who jumped in not knowing much about cycles. They bought a property at a high point hoping for cash flow. Recession hit and renters had reduced hours at their jobs which led to late payments on rent or no payment at all. The starter investor who saved a long time for the first property down payment now instead of an investment generating cash the investor was FEEDING the property and mortgage to stay afloat. There were a ton of these investors that took big losses in foreclosure or short sales. In the bottom of a recovery cycle anyone can be made to see like a Rockstar investor as they ride the wave up and generate equity even if they make tons of mistakes.
When cycle gets more top end and margins get tighter that can be where an experienced investor shows their knowledge and ability to shine performing through all market cycles.
So in summary if a new investor is (hanging their hat) on one property in a top cycle to start that may not be the best strategy.
If someone makes 60k a year and took 5 years to save up money for down payment then taking on big debt in top cycle might be a bad investment.
If someone makes 300k a year but lives like they make 80k and saves the rest if a smaller property goes from cash flowing 200 a month to losing 200 a month then generally not the end of the world. The high income earner could theoretically keep up the payments and when the cycle turned again could realize any potential upside. Generally when there is an upside on the next cycle it is higher than the last peak. Imagine walking up a mountain. When you get to the top of one peak you look down and see how far you have gone up. Then to get to the next peak you walk down a valley some to the next landing which is higher than where you started originally but not as high as the first peak you reached. So not always true but over time the curve tends to keep rising cycle over cycle. The investors that can hold on eventually the upcycle puts them in the plus column.
My commercial real estate investors are always looking to buy. They have considerable income from a job or businesses they own so have excellent cash flow already. If recession it just means they get it cheaper. People that have lot's of assets and income can generally have the ability to buy in any cycle. The starter investors or basic investor (herds) might only have the ability to buy when lenders give low down payment loans, properties in certain price ranges and rents, etc.
When investors have assets and cash flow they usually have OPTIONS in any cycle to invest. Someone making 50k a year where market conditions price them out and a reduction in their job hours takes away any extra cash flow to invest can stop their investing plans. People can only save so much money cutting costs. At some point people have to try to find a way to generate extra cash from a job or business to invest.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Joel Owens its very much buried in the buy and hold mantra that buy and hold does not get affected in severe market corrections.. and that people need a place to live etc etc.
for sure there are markets that are much stronger than others.. but make no mistake.. hundreds of thousands of landlords got wiped out in the GFC.. and this was for a variety of reasons..
Take PHX Vegas.. new construction stopped.. renters out of work left the area.. I had clients with 4 plexs go 100% vacant and stay that way for more than a year.. and one owned 4 of them they paid 350k each for .. banks sold them in 2011 for under 100k each as they were empty and needed full rehab.. that investor.. and this was an attorney and other professional from Bay area.. totally wiped out and credit shot.
IN your end of the business those with 5 year call loans had major stress in the GFC when there was no one to refi with and the core banks foreclosed.. that's were a lot of MF and commercial got recycled.. OPUS development out of MN multi billion dollar developer went under.. could not refi their portfolio.. ETCETC
In Atlanta I had loans on homes that appraised at the top of the market for 120 to 150k.. values dropped into the 40k range. again more houses than renters. it was tough.
So bottom line we are in a correction or slowing no question.. its not if its here.. just on value run up.. economy and jobs is still seems OK in markets I am working.. but the markets could not remain white hot forever.
- Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes7y
Originally posted by @Joel Owens:
. . . In the bottom of a recovery cycle anyone can be made to see like a Rockstar investor as they ride the wave up and generate equity even if they make tons of mistakes. . . .
The one challenge with market cycles is no one rings a bell at the bottom or at the top.
After the Financial Crisis of 2008, for example, the financial media was looking for "green shoots" as an indication the economy was recovering. Warren Buffett was investing (according to his op-ed piece in the New York Times) because he was betting on the future of America, but most people were on the sidelines.
Historical graphs of the market look smooth and spotting the bottom is easy. The price curves of the current market are always jagged and most people wonder if we've reached the bottom (or top) yet. Buffett and other value investors already know the intrinsic value of their potential investments and have their shopping lists ready when Mr. Market puts them on sale.
- San Francisco, CA · Member since 2016 · 27 posts · 7 votes7y
Originally posted by @Russell Gronsky:
The DOW just rallied 1,000+ points today. We are surely back into a booming economy again, right ?!?!?! No more recession concerns? hahahahahahahaha
Hate to break it but this is the most likely cause of algorithmic trading. I predict our stock market will have more wild short swings in the future due to this.
Algorithms saw low prices and bought in fat, swinging for today. The true test will see how it holds up in the next week. Hopefully, I'm wrong!
- Specialist · FL · Member since 2018 · 27 posts · 13 votes7y
As an investor moving from a few SFH rentals into more aggressive strategies I echo the sentiments of those that welcome the slow down. Deals are not hanging from the trees, hard to "buy low" without massive effort of time and or money. I do not want to see people loose jobs but corrections are reality. Feels like we are already, in many markets, in a housing slow down. I just sold a house hack in Tacoma WA and it sold in 48 hours, but everything else around me was sitting for 60-90 days, and just in the summer everything was going in days with multiple offers. I am in Miami now and its going to be very interesting to learn this market and what will work and what wont.
Gerald S. Renoe
Miami, FL Metro Area
Active Investor, Rehab, BRRR.
Looking for Sub-Syndication Opportunities. Originally posted by @Todd Dexheimer:
1. Make sure your loans are long term fixed
2. Have ample reserve funds (I suggest 9+ months of principal and interest payments)
3. Keep leverage 75% or less
4. Buy for cash flow with a value add to increase equity
5. Buy in growing economies
This. I welcome down turns as I'm ready to buy. And it's not exactly a shocker that the market is slowing, I've been posting that it would in 2019/2020 for the last 2 years. It's rather predictable actually if you understand economics.
Last recession , I saw it coming, we were going to fast in the housing market so when it hit I had one property on the books & had bought it at a good price so I still had room for profit when I sold it. I usually was carrying 4-6 house to flip here in San Antonio. My advice is to go slowly , don"t over extend yourself , & if you have a few good cash flowing properties you should be ok. If this recession really becomes the depression of all depressions as some have predicted, then it will affect all of us so no use worrying about it !!
- Member since 2017 · 66 posts · 91 votes7y
Well @ Mark Nickoson nails it.
1. No one knows if a recession is coming. Wrong- It is coming fast the business cycle doesn't stop. It is a cycle. This is the longest business expansion in history. So do you think we are closer to the begin or end of the cycle?
2. What makes this one different. This will be the first recession to happen in 30 years in a rate raising cycle. So what does that mean. There will be many that will be burned when they are unable to re-fi in a rising interest rate environment.
3. You should have been preparing since 2008 like I have for the next recession by raising COLD HARD CASH. You see to truly benefit like the big boys you have to skip a cycle and have cash hoards on hand to take advantage of the downturn. I got lucky and bought my 35 acre tree farm in 2009 for peanuts compared to what I could sell it for now. Plus I have had 10 years to pay down the note to less than %50 of the loan value and not market value.
4. I haven't mortgaged a purchase since 2006 and have re-fied alot since the purchase, with my average leverage at 40% of loan amount and about 25% of Market value.
5. I am looking forward to buying multiple properties from every investor that claims on this site " I have 100's of properties". Everyone of these genius' have bought their properties in a falling interest rate environment (i.e. since 2000) and most advocate keeping them highly leveraged. They have a cruel lesson coming. You need to go back to the mid 70's to appreciate how the next recession is going to be. Do yourself a favor and research the interest rate cycle. We are transitioning to a rising rate trend. If the investor on this blog giving advice picture looks younger than the age of 55 then run from their advice. They didn't live through the 70's and see what interest rates did to real estate investors.
6. Also, you need to research what happens when a currency resets. That is more than likely to occur with the next recession. Also, do yourself a favor and find out what the book "The Fourth Turning" is about. We are on the cusp of a change that occurs every 80 years. It will affect us in ways that you can't anticipate. The one thing I can say is look at what leverage did to people at the end of the 80 year cycle. It will make you cringe. 2008 was just a warm up.
7. So my advice to you as a newbie/neophyte is to raise CASH and wait. Your opportunity hasn't passed you by, it is yet to come.
GLTA!
- Also, the consistent theme is to prepare for any upcoming recession by hoarding cash, be minimally leveraged, and buy assets at a perceived bottom of the cycle. Question is, what assets are we to look for? Residential RE seem less loved if a workforce seems to be leaving (like the Vegas example by Jay). Commercial retail seem alluring, especially when their shorter loan terms get called in the 5 years. These tenants are probably less reactive regarding a leaving workforce - harder to pickup a nail salon or donut business to another city. How about land assets, whose current owners may want to liquidate to raise cash to feed their loan payments elsewhere.
- Member since 2017 · 66 posts · 91 votes7y
Rapidly rising interest rate environment crushed many investors because of balloon payments. If you have a balloon cross collateralized loan (which weren't really available 40 years ago) I would be very concerned right now.
As I said we are transitioning from a falling interest rate environment to a rising rate environment. These are normally 40yr cycles.
Interest rates rise=falling housing prices.
Bring in a good dose of stagflation and consumer staple prices rise but constrain ability of landlords to raise rents to make up for rising P&I payments for ARMs and Balloon re-fi.
At the same time stagflation causes Insurance premiums, trash collection, maintenance costs, and other variable costs to escalate. Again, the highly leveraged and minimally cash reserved investors are the first to hit the windshield.
Of course I may be wrong, but Interest rate cycles and the business cycle are pretty well documented and predictable.
So ask yourself, do you think we are closer to the beginning or the end of both these type cycles?
- Member since 2017 · 66 posts · 91 votes7y
https://www.cnbc.com/2016/11/17/200-years-of-us-in...
Learn from history so you aren't the one repeating it.
- Rental Property Investor · Littleton, CO · Member since 2014 · 150 posts · 114 votes7y
If you are buying and holding, and have healthy cash flow on your properties, it makes no difference what the market does, people will still need a place to live. Make sure to buy properties with plenty of room to lower rents if the market changes.
Buy for cash-flow, mortgage pay-down, depreciation and appreciation is the icing on the cake.
If you buy for appreciation, in hot markets and rents don't cover costs, you can get in trouble.
Since you are in Grand Rapids, what do you think about Realtor.com's 2019 forecast #1 Grand Rapids for appreciation next year? You mentioned that your custom home business only receives a few calls a month now. Does slow custom home business and MLS SFR resale have any correlation?
Terry
- Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes7y
Originally posted by @Terry Lao:
Since you are in Grand Rapids, what do you think about Realtor.com's 2019 forecast #1 Grand Rapids for appreciation next year? You mentioned that your custom home business only receives a few calls a month now. Does slow custom home business and MLS SFR resale have any correlation?
Terry
I think it will be a shift in the way the consumers view there home. During 09-11 new construction stopped by you still seen home owners doing remodeling and updating. I believe property values are going to raise but not like they are forecasting.
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