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.
I'm debt free and continue to improve my properties and build reserves. Not going to purchase any new properties at this point. Just hold and see what happens.
If it really comes in 2019, be prepared to buy cheap houses. But even if it doesn't come, make sure every deal is "recession proof" (buy it with enough discount and cashflow) so when it comes you are covered.
I think its definitely something to keep an eye on but don't forget, there are always buyers, sellers and renters. If you buy correctly, a downturn won't make a huge difference, don't use what might happen as an excuse for not making a move!
@Jay Hinrichs what you wrote about the devastating effects of the GFC on so many investors is spot on. At that time I was invested in only 2 SF properties. One bldg was gutted and vacant, and I had to use family $$ to renovate it, so I could rent it out and get back in the black! (Carrying a big negative cash flow on a vacant bldg/development project sucks ;) So even investors in prime blue chip markets were at risk (like I was) due to leverage.
AND THIS IS WHY this late in the cycle I am NOT adding on more properties. I am now in the enviable position of how more established local S.F. investors were during the GFC- they had several appreciated buildings, were cash flowing nicely, and were not over leveraged nor sitting on non cash flowing development projects. In the 2-4 unit space they had low interest fixed 30 year rates, plus a low property tax base. I remember admiring how they were not sweating the GFC! I remembered that well, and decided when this last cycle started and I was “back in the game”, that I would not over leverage and put myself at risk. It’s hard to do that when you’re starting out, as you need to leverage to build your base. But once you have some momentum, you really need to watch for the down side, to preserve what you’ve worked so hard to build.
I highly suggest that people learn that lesson well, by being cognizant of where we are in this cycle, BEFORE it’s too late!
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But to answer most succinctly the original question posted, “What if a recession is really coming in 2019?”:
We're already in an economy that has some bumps. During the last crash, the deals started to flow for two years after that stock market crash. That was a very deep real estate correction, one that we probably will not experience again in our lifetimes.
Many astute real estate investors are betting that multi-family has crested already.
@Shanese Francis who cares, buy right, and rent them out. Up or down , 10 - 15% is meaningless. Rent still comes in, and thing always come back, Good luck
@Brian Ploszay Good points...and here is the BUT, and it is for a lot of posts. There are still deals. Very market dependent and investor dependant. People on the site have been predicting rain since 2010...and they missed ALL of the run-up waiting for it to take the "next leg down." Know your market, do not get greedy, assume higher vacancy and analyze deals with NO rent growth, not deals that only work with 5% annual appreciation and 5% rent growth.
We are still buying multi family..but...we are underwriting with stagnant rent growth and higher vacancy. There are still deals out there, even in areas like mine (south of Portland.) We are looking for those 20-25% under market rent mom and pop properties who have not been managed well, we self manage (have a manager and handyman) and we buy properties near our others so I know I can get rents up, get expenses down and be fine. If you think you can not time the stock market you sure as hell can not time the real estate market.
I have said this before, people who think they will get financing if we see a huge drop clearly did not try in the last downturn. Our loans are 10 year with 1 rate reset, 30 year amm on both terms (so second reset the term resets to 30 years, it doesn't stay at 25 years left from initial 5 year), do I know what prices will be in 2 years, no clue, do I think the greater Portland market will be worth more (rent values and value) in 10 years...yeah, that is a bet I will take as I know I can operate cheaply and have quality workforce and B properties.
Be cautious but not paralyzed and raise cash!!! If you do not need it for reserves it is fresh gun powder to bring down deals if the prices look good!
I like the market you are in - Portland. Your sentiments are reasonable. If you are growing modestly, you will still uncover the occasional value-add property. Standard multi-family deals that are on the market today are overpriced, plus we are facing some headwinds. I bought a building four months ago, value add, that was off-market. Decent deal despite any potential downturn.
I agree with Todd Dexheimer's suggestions. I'd also add: avoid turnkey and A-class properties. Buy B & C class in good up-and-coming locations and add value. You should be okay. I bought through the 2008-11 real estate collapse and recession, and it was anxiety-producing, but the B & C class properties I invested in were surprisingly resilient. This is what tends to happen during a recession: homeowners who get into loan trouble become renters. And renters in A-class, high-end properties can no longer afford them, and move down to B & C class units. So B & C class properties are a good place to be. The investments we made in these assets in 2008 (just before the collapse) had tripled in value when we sold in 2015. Be careful. Pick a good location. Buy cheap. Don't over-leverage (75% LTV is reasonable). Add value. ...Good luck!
Friends, I always appreciate the viewpoints and diversity of views and experience that enter the recession discussion. Seems that one aspect of greatest import is also risk tolerance. Recessions are great opportunities and I wish BP existed back in 2008 (and that I had the cash and wherewithal to do something about it). I need to buy soon due to a move (with an eye towards future rental and cashflow/mortgage paydown), but am planning for the buying opportunities the recession will present.
One note: mixed economies with a military presence (especially in this increasingly troubled time in the world) can both provide opportunities to invest and weather the storm.
Best of luck to all, and may you learn to make your own luck.
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.
We are going to 'retire' zillions of baby boomers over the next 15 years. Pension funds are underfunded. Govt is underfunded. Where is this money going to come from? Thin air! The fed is gonna print it. And they are gonna do it bc it is easier than telling everyone that they don't have the money to pay us.
The pension insurer will go bust as well. Those who thought they had iron clad pensions for their 30-40 years of work will have a fraction (at best) of what they were promised and a small fraction of the buying power they thought they'd have. :-(
My .02: If the value of your properties drop 30%, can you still afford to keep them? If so, you're ok. If not, get out now while you can.
Most of my properties are duplexes and piti is about half of my rental income. I refinanced several recently and have cash on hand. I'm still in one of the least expensive neighborhoods in intown Atlanta, (rents and purchase prices) .I rent to artists, who are used to lean living. They share a 3 bedroom with 2 or 3 people at $ 850 total. So, they each pay $ 285 or so per month. That's doable even if working for McDonalds. Much easier to survive when I have 2 or 3 income earners in a unit than having a family with only father working (in low-income areas they would normally pay more in childcare than what the mother can bring in when working, so she tends to stay home) and him potentially losing his job.
I'm still buying, but have to cashflow and be close to development that will bring quick appreciation.
I also started dabbling in Hemp penny stock. Now that CBD oil is legal, it'll change the ballgame ;-)
I think what @Marisa R. said is perfect. Keep things nice and simple. Don't get over-leveraged, and know your local market.
@Shanese Francis since you are looking to house hack, just make sure you are comfortable with the debt you put on whatever place you buy. Even with a down turn, it can still be ok to take out debt, especially a traditional 30-year mortgage. Just don't be overly aggressive.
You'll actually be in the best position come a down turn. You'll have little to no house payment (assuming you buy in an easily rent-able area) which will help you accumulate money faster to buy up the deals that will be hitting the market.
There is a recession in Asia and one of our biggest trading partners China is dragging down growth throughout the region. The tariffs are the tip of the ice berg. I think in order to stop this ship from sinking is to bite the bullet and let it crash however since no one is brave enough the bubble will be worse and the crash will be a lot worse. Many of the US companies do business internationally so that will reflect at the slowing growth here also.
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.
Joel, taking this advice into account, what would you suggest to someone who's in exactly that situation? We have pretty ok day jobs, 1 small car payment and our personal house mortgage. No other debt. We have a good amount of money to invest but with it being the top of the market, it seems stupid to go for it now. But it also seems stupid to sit on the sidelines and wait for something with an unspecified timeline.
My typical clients are all multi-millionaires. Investing can be viewed differently sometimes at varying net worth's. If someone is worth say 300k and makes 50k a year then a 200k investment at the top of the market might be high risk. If you like residential single family homes my experience seeing cycles is that when a down turn happens the higher quality areas in the entry price points tend to hold up better for value. Mid to lower end areas get hit HARD. These renters tend to have very little assets and live hand to mouth. So when an economic blip happens and they are carrying debt and hours get reduced they get in trouble paying the rent. More affluent tenants not always but in general can have assets and reserves to pull from if they have a job loss or reduction in hours until they find a replacement.
I don't want headaches for cash flow so invest in commercial real estate. I did the residential landlord thing and didn't like it. I like waking up everyday doing what I want, when I want, and not listening to every made up story in the book on why rent can't be paid or only partially paid. It's not my cup of tea.
If you focus on residential single family some ideas are. 1. Find the most run down property in the BEST area and see if you can fix it up and rent it out. 2. Buy a new house from a larger national new subdivision builder in phase one of development. When subdivision sells out you then could possibly have nice upside equity in 18 to 24 months. I make lot's of money transacting commercial real estate so I am more focused on the equity growth side with investing. 3. Buy a 4 unit in a nice area. With down payment if 1 tenant goes out you still might have enough occupancy at 75% to pay the debt and not come out of pocket like a single family house not generating any income.
There are investors on here that are rock stars being residential landlords dealing with more low income type tenants. I just like being care free and don't want the drama in my life.
Right now in residential it can be okay to purchase if you buy right. What you DO NOT want to do is to buy something just to buy and then it is a mediocre property where you are saddled with bad debt. If this happens then when a good deal does present itself you now have that down payment stuck in a mediocre property and the debt can count against you qualifying for another property. In addition if you do not have a great property to show as an example to the bank going to buy the second property it can look bad getting funding for the next property.
Bottom of the cycle any investor can buy and make mistakes and the up wave can many times bail them out to breakeven or a profit on exit. At the top cycle for a particular asset class the experienced investors sharpen their pencils and only act when they feel like a great deal is in front of them. There are buyers out there (making the market) with what they will pay and they have a great chance of losing money. The last downturn the investors owning 1 rental property made the mistake of depending on that property to throw off cash flow. If it did not then it took many of them under.
If an investor after down payment for an investment property such as a house doesn't have 6 months reserves to pull from if rent is not paid, eviction costs, etc. then they seriously need to look at if they should buy that property. Without reserves what an investor is saying is they are hoping everything goes perfectly and statistically that doesn't happen with investments. So you underwrite conservatively and then if it goes better than that you have icing on the cake.
As another investor Brian Burke put it on a podcast he mentioned (perform to perfection).
So if you have to underwrite a property where to make it viable it has to (perform to perfection) then the odds of success are not in your favor. It is great if the property does (it's more rare) but you cannot count on it. When things do come up with a property you hope they are smaller in nature and not whoppers that heavily affect the long term success of the property.
Julia when you say (good amount of money to invest) that can be relative. Is that 50k,100k,500k,1 million? Different investment types open up at different levels.
There's a lot of fear mongering going on. Folks saying that we are at the point of a recession or a bubble and bust in the housing market. I for one, don't believe it. I wrote a blog just last week on this topic on my blog site. I'm happy to share with you, so PM me.
Truth is...the facts state otherwise. The economy is humming along, jobs hit an all-time high in December with over 300K new jobs created in one month, lending standards are back to normal and show no signs of easing, housing prices are leveling off due to more inventory starting to grow, new construction still has a way to go but is definitely showing signs of life again, buyers are out in force and wages are starting to increase again after 12+ years of stagnant and dropping wages. Recession? Absolutely not.
@Shanese Francis it mean's that the underlying market has some irrational pricing. When the PE ratios climb irrationally high, it mean's that the market could be, and most likely is overvalued. Pricing correction is needed to justify why it's so much higher than other types of investments, for example, real estate. Portfolio adjustments should be made when pricing is irrational.
Buy affordable housing properties that cash flow in a market with diverse employment, and you almost can't go wrong. Wait for blood in the streets, and then open your pocketbook. While unfortunate for many, recessions are the right time to acquire. I'm stockpiling cash at the moment, but still won't stay on the sidelines for properties that meet the above criteria.
