Warnings of Recession

140 Replies

Echoing what a lot of people have said here... I bought my first duplex a couple years before the housing crash. I was underwater for years but it didn't really matter because I always had positive cash flow. Even with the bad economy, rents in my area stayed pretty stable and I was always able to find good tenants. If you're in a desirable area where rents will be steady, I'd say your risk is pretty low as long as you drill down into your numbers and make sure the math makes sense!

@Gadiel Del Orbe I do not see a serious recession coming any sooner than the next 18 months to 2 years. It may extend a little beyond that, but unfortunately, coastal regions will most likely see the impacts on RE first. Regardless of prices, interest rates are expected to relatively hover and potentially decrease slightly. That coupled with a low national unemployment rate, and a sting overall consumer, and I do not see that changing at the moment. That doesn’t justify overpaying though. If you hunt down a deal, it survives market ebbs and flows.

I am holding off until I see what the market does. In a correction, sometimes good deals hit the market because Owner's can't hold on, as they bought too high and rents are declining. I always look for buy low, sell high strategies. I would hold off for now and continue watching things. Additionally most markets on the West coast do not cash flow. You would likely be riding the market for appreciation only in Los Angeles; the same is true for us here in Seattle. The cash flowing markets are mostly in the Midwest and the South. There's some possibility for deals there, but with the uncertainty ahead, and unfamiliarity with those markets, I wouldn't recommend at this time. Patience is a virtue. Know when to wait it out in the wings and know when to pounce.

I'm still buying and the only thing holding me back from acquiring at a faster pace is the financing backlog caused by everyone trying to refi. As a buy and hold investor, a deal is a deal in any market. 

@Gadiel Del Orbe ,

All these crazy people talking about "if the numbers make sense"

The numbers might make sense if the property is vacant and you get can top of market rents for both units without a ton of rehab. In California in premium markets you generally have to put work in to cycle tenants cuz #justcauseeviction #deferredmaintenance 

Short Answer: If your concerned about market conditions buy the duplex and put a voucher tenant (section 8) and not a market tenant. Up in the Bay Area you don't know what the tenant portion will be until you agree to take them on. You can get a lead from what they are currently paying. If there is a market correction you have a guaranteed source of income that will likely not go away because it's now pretty difficult to get on housing in California in most cities. 

If population in California in the markets you're interested in continues to increase you'll be slightly insulated from market corrections. The process of making the property perform in lots of rent control areas is not short so why not start now.  

Generally speaking I thought there was rent control for most areas in LA proper? Inland empire might be different. There are owner occupied evictions at least in the bay area and recent city ordinances at least in the Bay Area require the owner to pay tenant relocation which is a sliding scale based on how many bedrooms the unit is a 2bd is 8700ish in 2019 in Oakland.

I don't know the specifics of your situation as you didn't talk about financing that you were looking at. FHA loans (3.5%) for owner occupied duplexes most of the time don't work because the rents aren't high enough which push you into a different loan program. At 10% down it usually won't cash flow because there is rent control in many cities in LA until you cycle tenants (possible cash for keys buy out)

Owner Occupant evictions at least in the Bay Area make it so you can't return the unit to the rental market for a couple of years (2 or 3 ) once you complete the work. 

The Moral of the story: 

I can applaud your desire to get a duplex. Check to see if the property that you're interested in is subject to rent control. If it is you should talk to a lawyer. Know that the lead time on lawyers of this type doing things for you is longer than you'll likely want it to be. Understand if the cities that you're interested in buying in have just cause eviction. If they do short of someone not paying rent you'll likely need to buy them out to increase the cash flow in the fastest way. 

Now the pain: 

If it's in a rent controlled / just cause eviction area it will cost to make the property perform the exact numbers are dictated by the tenants, their needs, and how you can negotiate.

Oh BTW: Rent Control / Just Cause (maybe vacancy control ) will come to more markets in California it's only a matter of time. 

@Gadiel Del Orbe over the last 12 months I've had a few clients say they were concerned of a recession and that certain locations in the Los Angeles area (Inglewood) have hit their peak so they weren't willing to buy at that particular time.  

The clients let me know that they wanted to wait for the market pricing to go lower in the area before buying.  The last 12 months many of the properties I showed these clients sold at reasonable prices and properties continue to increase in value.  

At the time I tried to convince these clients that while there may be a recession there are still good deals to be found in the market and that if purchased correctly there would be good appreciation going forward.

Today on espn.com there was an article that discussed the LA Clippers building their new stadium in Inglewood, CA and the amount of money they will be putting back into Inglewood.  By investing back in the market the value of properties will continue to increase and if my clients would have purchased when they were supposed to they easily would have gained approximately $100,000 in equity over the last 12 months but their concerns of a recession and the market being priced to high limited their ability to make money.

While there is never a guarantee in real estate if you've done your due diligence, your working with a qualified agent and you buy correctly you should be okay.  To be a successful real estate investor at one point you have to take action whether it is here in Los Angeles, out of state, or your buying for cash flow or appreciation just take action.

https://www.espn.com/nba/story/_/id/27588999/clips-arena-deal-include-100m-inglewood

HI Gadiel,

There is a lot of good feedback here already. If the government, economists, or anyone could predict recessions, there would not be any as then they could take preventive measures to avoid them.  No one can predict what or when.  Yes, there is something in the air, housing prices are high, the yield inversion curve, stock prices are high, the debt bubble, etc. The question is are you ready and prepared to buy now? Do you have the knowledge base, the network and support, the financial capabilities?  Provided you make sound buying decisions, and are realistic, safe and even conservative with your numbers, then there is NO BETTER TIME THAN NOW.  

Tomorrow is not promised, none of us can predict the future or where we will be or what will happen. You can only live in the now. As others said, when you look back at prices 5-10-15-20 years ago, there are a lot of us experienced investors that wish we bought more and at some points, probably everything we could, though still at that time, we purchased with a certain view or lens with criteria that made sense to us.  I still buy today with that criteria and will not overpay for properties like some other newer investors that don't know any better due to all the hype in this business.

There is always reason to be cautious, though there are always opportunities within real estate investing in any market. I survived the last recession with few bumps and bruises, as I am in this for the long term. I have a business, and am in the process of building wealth so make sure you take this seriously as a business, and run it as such, with goals, and a plan and  you will be fine.  Starting out, I always recommend to network, and find others that are experienced to help guide and coach you.  This will expedite your learning and help you minimize your mistakes.  BEST WISHES!

Originally posted by @Gadiel Del Orbe :

I'm currently renting in Los Angeles and the rents are super high. I want to buy a property, but I am a little afraid especially after the treasury department said we are looking at early signs of a recession. I was working on buying a duplex for my first property, but the news stopped me. What should I do? Should I wait to see what happens? or Should I still buy? As a first-timer what do you recommend I do?

I wouldn't wait to see what happens.  If you're worried about a recession then I'd study the market in your area or the area you want to purchase.  What happened to the prices during the last recession?  Are there properties available at a discount that you could acquire?  Set up criteria for what works for your budget, your lifestyle,  along with what works for your fear of a recession.  Then keep looking. If you go in a shell and stop looking you'll most likely miss out on an opportunity.

Originally posted by @Jason Monroe :

@Gadiel Del Orbe ,

All these crazy people talking about "if the numbers make sense"

The numbers might make sense if the property is vacant and you get can top of market rents for both units without a ton of rehab. In California in premium markets you generally have to put work in to cycle tenants cuz #justcauseeviction #deferredmaintenance 

Short Answer: If your concerned about market conditions buy the duplex and put a voucher tenant (section 8) and not a market tenant. Up in the Bay Area you don't know what the tenant portion will be until you agree to take them on. You can get a lead from what they are currently paying. If there is a market correction you have a guaranteed source of income that will likely not go away because it's now pretty difficult to get on housing in California in most cities. 

If population in California in the markets you're interested in continues to increase you'll be slightly insulated from market corrections. The process of making the property perform in lots of rent control areas is not short so why not start now.  

Generally speaking I thought there was rent control for most areas in LA proper? Inland empire might be different. There are owner occupied evictions at least in the bay area and recent city ordinances at least in the Bay Area require the owner to pay tenant relocation which is a sliding scale based on how many bedrooms the unit is a 2bd is 8700ish in 2019 in Oakland.

I don't know the specifics of your situation as you didn't talk about financing that you were looking at. FHA loans (3.5%) for owner occupied duplexes most of the time don't work because the rents aren't high enough which push you into a different loan program. At 10% down it usually won't cash flow because there is rent control in many cities in LA until you cycle tenants (possible cash for keys buy out)

Owner Occupant evictions at least in the Bay Area make it so you can't return the unit to the rental market for a couple of years (2 or 3 ) once you complete the work. 

The Moral of the story: 

I can applaud your desire to get a duplex. Check to see if the property that you're interested in is subject to rent control. If it is you should talk to a lawyer. Know that the lead time on lawyers of this type doing things for you is longer than you'll likely want it to be. Understand if the cities that you're interested in buying in have just cause eviction. If they do short of someone not paying rent you'll likely need to buy them out to increase the cash flow in the fastest way. 

Now the pain: 

If it's in a rent controlled / just cause eviction area it will cost to make the property perform the exact numbers are dictated by the tenants, their needs, and how you can negotiate.

Oh BTW: Rent Control / Just Cause (maybe vacancy control ) will come to more markets in California it's only a matter of time. 

 So, don't buy in CA

I believe there is a huge difference between a recession and a depression which we were in 2008-12. That was a once in a lifetime occurrence. Last time I remember it was that bad was the in 1970's when interest rates were in the teens. I remember my dad bought a house with 15% interest. People still buy houses (retail) in good or bad markets, maybe just not as many. The Dodd-Frank legislation cut all, if not most of the crazy lending that was going on during that time. Historically, we've never had a recession/depression like 2008-12 where housing went down in every US city, usually it's regionally like LA in believe in the 80's. No you can't get the deals in volume like a couple of years ago, but it's always a good time to buy a deal. 

Have a contingency plan if you fail to get renters.  Be prepared to occupy one of the units which should carry your costs or nearly so for the duplex.  Check your current lease if renting ti see how an early termination might be worked out and at what cost.

Just because it can be difficult to operate in California shouldn't sour people on the market as a whole.  

Each market is nuanced. 

The rents are high in California but so is acquisition cost. It may cost more to operate in, but if you are house hacking you have to live somewhere. 

People live in California for a reason understand so it's important to understand the legal climate associated with the market your operating in. New York City has a history of abusive landlords and have a significant number of laws governing interaction between landlord and tenant. 


You can mitigate fear through knowlwege and better understanding 

While I respect, appreciate and understand where most of the answers are coming from, I want to point out one thing here to see if you can give insights how to prevent this. 
If you see the stupidest purchase in the history below right before a major recession and know how to ever prevent it, please enlighten me ( and possibly some others like me). 
When that purchase was made, all books, podcasts, articles and advice given at the time was about buying your own home and nothing else. Advice followed and disaster in finances occurred. 

We chatted a bit about this when the recession fears were starting in earnest.  Here is that post and sorry to repeat, but honestly not much has changed.  This one speaks to Denver, so the prices reflected in the LA specific Case-Shiller index will look a bit different. There's definitely some nuances, but you will see they are quite similar. For example, Denver did not participate in the 04 runup, so the prices feel really high there, whereas LA partied pretty hard then.  But, there are a lot of similarities and you can get some idea as to the potential downside and I totally agree with @Victor Saumarez that there is valuing in looking at them.  

That's their take, and I agree. I am sure you learned from your macro classes that there is always a bear in the woods, and a reason not to do a deal. Real estate is intensely local, or in macro-speak: highly inefficient.

Rates DO affect refi, and hence overall transactions, but new home purchases are steady, and even boring. Ping me if you want charts on that.

Here's a bit more macro, and a last chart:

The red line all over the place is the 2-10 spread, probably the most accepted 'yield curve' indicator. Yeah, I ran it a couple weeks ago, so it doesn't show the inversion, but you get the point. Shaded areas are recessions, so you can see the problem with the indicator: size of the inversion doesn't really indicate length of recession, you can't 'time' off of it, etc etc. And, while this chart doesn't show it, as it was messy enough already, the size of the inversion doesn't portend the size of the recession. What's important here is the blue line in relation to all this. It is the Case-Shiller US national house price index, probably the best indicator of house prices. It's not perfect, but probably best, and I see you're from Colorado, so you may want to look at the Denver only price index (which I find fascinating, by the way). The point is: the blue line doesn't seem to pay attention to the red line, and quite frequently not the recessions either. 08-09 was an exception with a high degree of correlation, and we could discuss causation for a long time, but neither would disagree it was bad for all camps.

But; even here: you are not buying the index. You're very unlikely to ever gather enough data, or learn enough, or analyze enough macro to pull the trigger on investing in real estate. Stocks....maybe (but I doubt it). Real estate: no way. For real estate: study local, learn local, and invest local.

@Gadiel Del

Why is the sky always falling? If you make good investment deals it doesn’t matter what the economy is doing. We are in one of the best economiies ever. If you aren’t making money your doing something wrong.

@Gadiel Del Orbe good deals are in every market cycle. Listen to the podcasts and use that knowledge to interview real estate agents. It should be crystal clear who knows the business and who just says they do on FB. The good ones know the deals and are excited to have a new partner.

I heard of someone who's strategy is paying 20% down and buying a fixer upper and making sure it ends up at a 65 loan to value ratio after fixing it to be protected by the market tanking 35%. In other words you should be fine if you are getting a good deal to value add and protect yourself.

In August of 2019, Warren Buffet's company Berkshire Hathaway had a record $122 Billion of cash sitting on the balance sheet. Year to date, they have sold more investments than bought. Warren Buffet <-- The guy who seems to know everything about when to invest and when not to invest.

It seems like Warren should read this thread so he can take some advice and put his money back into the market lol.

It shouldn't surprise us that nearly all of the real estate agents and brokers, who have much to gain by the 'there's never a wrong time to buy' public perception - are touting the 'there's never a wrong time to buy' line.

After all, @Gadiel Del Orbe - if you want, I'm sure many would gladly represent you on the buyers' side!!! 

@Randy S.

Exactly!  Whether it's an equity/stock, or any investment, price matters in a big way, relative to earnings.  While we can be long term buy and hold investors, if we don't get something at the right price - we're losing.

The public sentiment here reminds me of Orlando in 2007.  It's Florida, after all - nothing can go wrong.  People just keep want to move there, and things just keep going UP UP UP.  Luckily for me, I was a young engineer and prices were SO inflated that I was priced out of the market at my wages.  And, luckily for me, I had just enough critical thinking skills to also sense that something was 'off' in that conventional wisdom.  Sounds familiar....