LESSONS LEARNED - What would you do over from the 2008 crisis?

19 Replies

I've posted this in the "Real Estate Success Stories" forum but perhaps its would fit better in the "Real Estate Life Lessons Forum".

There is a ton of talk in the media but also on these forums of the precariousness of our national and global financial structure and the values of assets as currently traded.  Ray Dalio is even our comparing the state of the the economy to the late 1930's.  I also hear on all sorts of podcasts allusions to the 2008 crises and how the guest of the week "lost it all" and has spent the last decade rebuilding but this is rarely if ever delved into deeply.

The question I have been pondering for the last 24 hours is then, if we take it for granted that an economic fall is coming, and that may have some effect on the property markets (prices, rents, etc), what then do we do to protect and position ourselves.  A simple answer may be to have plenty of liquidity and don't over leverage yourself but what then if you are trying to build out a portfolio where your tools to growth are leverage and reducing liquidity?

I would be very interested to hear from long time investors who have weathered the storms either crashing-and-burning and coming out stronger or simply getting through the cycle bruised but not battered.

Having searched for a topic and thread like this one, I don't think there is one quite exploring this aspect of real estate investing where we lay bare all our failures but it would be incredibly instructive to us newbies to learn from those who have gone before and come out the other side weary and with scars to show from the battle.

Hope you will find int in yourself to share so those of us who are new can learn.

@Josh Stack I am more familiar with Rental Do's and Don'ts. If a property is not cash flowing now, it might never cash flow. Don't assume that rents will always go up and eventually cover the payment on it. Build reserves, make sure you plan on 10 months of payments, 1 month for taxes and insurance and 1 month for repairs. 

You make money when you buy, don't overpay for something and think that adding a "do-dad" because you would want that if you lived there, is worth it to your renter. Buy as-is/where-is and make sure the deal pays for itself in rent to cover the expenses. 

We lost 5 properties to a Vulcher Capital group who bought properties at pennies on the dollar from a bank, then turned around and enforced the agreements because I used to have 2 doctors with me and the VCs saw $$$. Never partner with people if you can avoid it. But we still have 5, 2 rentals and 3 lease to own. 

@Jack Bobeck

I often hear "you make money in real estate when you buy, not sell". But what does this actually mean? And how do you know when you make an offer, if you are overpaying or not. Let's say a property does cash flow and costs $300K. Do you look at surrounding comps? And how do you know what offer without low balling and upsetting your realtor/broker?

I would have bought 5000 bitcoins in 2009 when it was created! :)

@Vika Bha , I think one way to be sure you don't offend your realtor is to find them on BP.  lol  If they do much on here, they know the tactics recommended and won't be surprised when you use them.  Also, if they are an investor, not just a realtor, they should be more open to your lower offers, IMO.

@Jody Schnurrenberger

Thanks! I've heard to offer 10-20% lower than the market price. Don't know if this would apply universally, even to cash flowing properties.

@Vika Bha , good to know. Of course, before deciding to offer 20% less, be sure to run it through the tools for cash flow and cash on cash ROI. What LOOKS like it will cash flow doesn't always. In fact, in the webinar tonight, almost 80% of folks said his example was going to cash flow. (He just pulls things from the internet and goes through the tool to show us how.) It DIDN'T. Even HE was surprised! But between the math and all the extra things like taxes, insurance, vacancy rates, CapEx, etc. it's too hard to just eyeball it.

Regarding giving offensive offers, Brandon Turner offered I believe it was $40k for a $90k property.  It was declined.  A month later he offered $45k and it was accepted. 

I was once house hunting for my mom in a retirement community.  I found the perfect thing, but when I got back to call her that day, I got word she was in the hospital.  I put in a super low offer just to drag things out while I rushed home to see what was going on with her.  The realtor called the next day and said, "I've got good news for you!"  I told her, "I don't think your idea of good news is my idea of good news."  I WANTED them to negotiate.  Nope.  They took my offer.  I had to rescind it as she was so sick we didn't think she'd make it.  (She did.)  Turns out I was the 3rd person they'd accepted an offer from but people kept having trouble getting financing.  The house was for sale by the kids after their parents had passed and they just wanted to be rid of the thing after all the trouble they'd been through.  

If you have a good realtor, I say don't worry too much about giving lowball offers.  It's not like the homeowner is going to hunt you down...probably.  ;-)

@Vika Bha It means do not buy your investments from brokers ( unless the broker is a friend of yours ). They want top dollar for bigger commissions and they market properties to the widest audience to benefit their clients.

offering less than asking with a property offered to the public may get you a "deal" however the real deals are the properties you buy directly from an owner off market. Depending on your market offering less than asking will get your offer completely disregarded.  Most brokers try to list property at fair market value.

Ideally the off market property is distressed, the seller is motivated, and no one else knows about it. Drive down streets off the beaten path. Drive down streets with dead ends. Look for something that is unkempt. 

Finding a "deal" online is hard unless the person has it listed on a site with very little traffic or visibility. 

Everyone is looking for a deal, however not a lot of people are willing to go find it. The real good ones are done face to face.

@Jody Schnurrenberger

Thanks for that information. Just some basic information on the property I am considering, it is $300K, 3 family, 2280sq ft, owner occupied (assuming it's in somewhat decent condition), rents are $1400 (4BR), $1100 (1BR, 1BA), and third unit is owner occupied (2BR, 1BA). Rental comps in the surrounding area are slightly more than what this home is renting for. Homes similar to this sold for $220-$300K depending on number of units, the $300K unit was 8BR, 3BA and sold back in September 2017, this home is 7BR, 3BA.

Insurance is $800/yr, Tax is $3538, property management is 10%/month. If I assume the owner occupied unit will also rent for $1100, this property does seem to cash flow. I am going to visit the property shortly and try to get all expenses such as utilities, lawn/snow removal, pest control, advertising, heat, etc, and also find out actual property tax and insurance numbers (got the above numbers off the internet). I plan on using 8% vacancy and 10% Capex, 5% maintenance, 11% prop management. Let me know your thoughts on this initial analysis. I am seeing it soon.

I appreciate your sharing your experience about bidding lower. Like they say, make money when you buy so I'll put in a lower offer, if I lose it, I can always find something else eventually. Can't believe Brandon Turner offers about 50% less and obtains the homes. Glad your mom made it through : ) Hope you ended up finding a nice retirement home for her!

@Rich Hupper

The property I described above is in a decent market and people are buying properties in the area for much higher than asking price so chances are, I'll get rejected but I'll probably try to offer lower anyway. If I lose it, try again I suppose : )

How would one find off market deals? Especially for multifamilies. I live in the northeast just like you, if I knock on a random door, I don't know if that will be received well? Would I just ask if the owner lives there? And if he/she interested in selling?

If investor is running a negative cash flow speculating the appreciation will increase one's equity, what happens the investor can not afford to put in when there is a job loss?

In fact,  that is exactly what happened to many investors and they had to choose foreclose their own or investment or both. 

Without having 6 months of living expense in the bank to cover vacancy, essential obligation I see there is a recurrence of disaster coming up.  Those who put in more down payment can ride out the next cycle. Those who brag they can get something with no down as posted on this site will faulter. I spoke to a Canadian banker he told me there are rarely defaults from home owners as the government really have tight control on loans making sure borrower are credit worthy. Most put 30+% down.   

This discussion was totally derailed from the OP’s question...which I would love to see answers to along with @Josh Stack , I’m assuming. 

Originally posted by @Josh Stack :

I've posted this in the "Real Estate Success Stories" forum but perhaps its would fit better in the "Real Estate Life Lessons Forum".

There is a ton of talk in the media but also on these forums of the precariousness of our national and global financial structure and the values of assets as currently traded.  Ray Dalio is even our comparing the state of the the economy to the late 1930's.  I also hear on all sorts of podcasts allusions to the 2008 crises and how the guest of the week "lost it all" and has spent the last decade rebuilding but this is rarely if ever delved into deeply.

The question I have been pondering for the last 24 hours is then, if we take it for granted that an economic fall is coming, and that may have some effect on the property markets (prices, rents, etc), what then do we do to protect and position ourselves.  A simple answer may be to have plenty of liquidity and don't over leverage yourself but what then if you are trying to build out a portfolio where your tools to growth are leverage and reducing liquidity?

I would be very interested to hear from long time investors who have weathered the storms either crashing-and-burning and coming out stronger or simply getting through the cycle bruised but not battered.

Having searched for a topic and thread like this one, I don't think there is one quite exploring this aspect of real estate investing where we lay bare all our failures but it would be incredibly instructive to us newbies to learn from those who have gone before and come out the other side weary and with scars to show from the battle.

Hope you will find int in yourself to share so those of us who are new can learn.

 A while ago, I was trying to dig up old posts like from 10-12 years ago on BP. Found out most people from back then are no longer here, probably accounts closed. Though Josh used to be much more active back then in the forums ;) My guess is 95% or even more members here are post financial crisis. Would be good to get people with 15+ years experience on the podcasts.

@Josh Stack

I started investing in 1998, all properties are in Brooklyn, NY.

Pre-Financial Crisis 

----------------------------

1998 - Bought 3 Family Building

2000 - Bought 2 Family Building

2003 - Bought 3 Family Building

2004 - Bought 4 Family Building

During the Crisis

-----------------------------------

2008 - Bought 4 Family Building

Post Crisis

-----------------------------------

2013 - Sold the 2 Family bought in 2000 for a 1/2 Million Profit

2014 - Bought 3 Family Building

2015 - Bought 3 Family Building

2016 - Bought 3 Family Building

2017 - in Contract for a 3 Family Building

What would I have done differently? Nothing.

BUT, if I had MORE money, I would have bought even more.

Basically, we made a killing and continue to do so.

What I found was most people who I was trying to convince to Invest with me were completely paranoid from all the news during the financial crisis.

Since the Mortgage Qualification standards changed, I was forced to take a break from purchasing from 2009 to 2012 to my regret. Those were fantastic times to have bought in Brooklyn!

Needless to say, my Partners and I have made $$$$.

One thing to think about is that before the Financial Crisis of 2008, the mentality was "No Way will Home Prices fall! They are not making any more Land you know!"

Then the Crisis happened. But in my area where I invested in Brooklyn, we barely noticed the crisis despite Wall Street being so close.

Today, most people are thinking, "OMG.... the sky is falling!!" A completely different mentality than it was prior to the Financial Crisis.

If people think so pessimistically, that tends to slow down an upcoming economic down fall as Investors begin to wait and see what will happen. Completely unlike just before the Financial Crisis.

My Investments should be similarly insulated from an economic downturn when ever the next time happens, if it happens here in Brooklyn, that is.

But I'm preparing for it by raising capital to accumulate even more Investments! :) So I'm preparing to buy on the dip! :)

Sorry, @Josh Stack and @Ryan E. .  I just had my home at the time, so I wasn't really impacted by 2008...minus that around 2009 I picked up 2 sets of duplexes because prices were down.  ;-)

@Vika Bha , shh...Don't go spreading this around, but I'll run the tool for you really fast.

Okay it DOES seem to work out. GOOD JOB! It cash flows $725 and has 12% cash on cash ROI. Of course, that does NOT include things you mentioned like snow removal and pest control, so since it just barely meets Brandon's suggestion of 12%, it might not afterward. But it's a guideline, not a rule, so it's up to you. As for things like utilities/heat, you can pass that along to the tenants to pay. ;-)

My mom pulled through then, but she ended up dying later, but thank you.

I don't think Brandon always offers 1/2 the value.  He just offers what he needs to in order for it to cash flow.

As for just knocking on doors, you can try that, though the owners probably don't live there if it's a multi-family.  However, they can probably give you the number to the owners or property manager.  You can also look up the address on most county tax assessor's websites and get the address of the owner.  But if you just send a letter, it might be ignored.  Calling is a better way to get a feel for the situation and to be SURE they know you are interested.  I read somewhere on here that doing direct mail usually requires something like 3-6 tries before you start getting responses.

Whatever you do, good luck!

I got in the market when 2008 was happening.  Actually, just before is when I took interest in RE investing.  I can say that the RE market does not feel the same.  Yes, we are over leveraged and prices don't make sense but it is not the same.  My guess is that the crash comes from another industry or sector like currency.  Last time we had the double down impact of the catalyst being in our industry .

For me, I wouldn't have bought that MF deal that eventually ate my lunch with negative cash-flow.  If I remember correctly, I closed on it just a month or two prior to the Lehman Brothers crash.  There were plenty of mistakes and problems with that deal too.  I wish Lehman would have crashed prior to me getting that MF under contract so that I would have never even bought it.

Hey all,

Thanks to @Ryan E. for getting us back on track and @Llewelyn A for sharing detailed info.

Thinking a bit more on this overnight I guess I'm really asking:

  1. What specific structures can adopt or tactics that you can employ to increase resilience to bankruptcy in a downturn? How would you stress test your portfolio?
  2. What leverage ratio do you employ or what level will you not go over as you then feel it would give too much risk and reduce your resiliency?
  3. What debt coverage ratio do you look for in your properties or portfolio?
Originally posted by @Hersh M. :
Originally posted by @Josh Stack:

I've posted this in the "Real Estate Success Stories" forum but perhaps its would fit better in the "Real Estate Life Lessons Forum".

There is a ton of talk in the media but also on these forums of the precariousness of our national and global financial structure and the values of assets as currently traded.  Ray Dalio is even our comparing the state of the the economy to the late 1930's.  I also hear on all sorts of podcasts allusions to the 2008 crises and how the guest of the week "lost it all" and has spent the last decade rebuilding but this is rarely if ever delved into deeply.

The question I have been pondering for the last 24 hours is then, if we take it for granted that an economic fall is coming, and that may have some effect on the property markets (prices, rents, etc), what then do we do to protect and position ourselves.  A simple answer may be to have plenty of liquidity and don't over leverage yourself but what then if you are trying to build out a portfolio where your tools to growth are leverage and reducing liquidity?

I would be very interested to hear from long time investors who have weathered the storms either crashing-and-burning and coming out stronger or simply getting through the cycle bruised but not battered.

Having searched for a topic and thread like this one, I don't think there is one quite exploring this aspect of real estate investing where we lay bare all our failures but it would be incredibly instructive to us newbies to learn from those who have gone before and come out the other side weary and with scars to show from the battle.

Hope you will find int in yourself to share so those of us who are new can learn.

 A while ago, I was trying to dig up old posts like from 10-12 years ago on BP. Found out most people from back then are no longer here, probably accounts closed. Though Josh used to be much more active back then in the forums ;) My guess is 95% or even more members here are post financial crisis. Would be good to get people with 15+ years experience on the podcasts.

 Hey @Brandon Turner , @Joshua Dorkin & @Mindy Jensen - this would be an idea for an upcoming show.  Get someone on who made it through but lost it all in the 2008 downturn and take a deep dive on what went wrong in their business, how they could have better positioned and what they would have done differently to avoid crashing and burning with the market.

Hey Josh.  Buying properties in good locations and adding value both provide downside protection.  Many locations and properties did not experience a big drop in value during the last recession and many investors' occupancy and rents stayed steady.  Adding value can also create a cushion and give you more control over your asset returns.  What happens in the national market is way down on the list of many investors' concerns who try to invest in locations and properties that are less susceptible to those forces.

What I learned....... like Buffet says... when there is blood in the street start buying..... I only wish I had more cash leverage at the time to buy like crazy. But like many others I was scared of what the future held....could I lose my job? wife lose her job? all my other investments tank? I was scared to extend myself with a nebulous future. But in hind sight, I should have bought a TON of foreclosures. I bought my 3 current rentals in 2011-2013 area, so I still did pretty good as far as purchase price, but I would have been even better in 2009-2010....

When the numbers don't make sense they don't make sense....don't get suckered into buying stuff just because every one else is... the "what am I missing?"

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