What's your plan when the real estate market starts to cycle down again?

28 Replies

A while back @Jay Hinrichs

 posted about the the real estate market levelling off 

http://www.biggerpockets.com/forums/311/topics/199...

and I got to thinking today about what happens after that. What are my plans to handle the inevitable part of the real estate cycle when values start to drop? I'd like to hear from the BP community about what they are doing now to prepare for that and how their strategy will change when it does hit. 

I don't believe that I'm smart enough to predict a real estate downturn or upturn, not even in my own market of Denver, CO, much less the rest of the U.S. I have no idea where the markets will be in 6 months, 5 years, or 10 years.

One thing that I DO choose to believe in and bet my money on, however, is that the market will appreciate more or less in line with historical averages over the next 30 years. I also choose to believe that the market here in Denver, CO will continue to be desirable long term. I think that's a reasonable assumption - far more of a reasonable assumption than trying to guess any which way over the next decade.

Those being my beliefs, and as someone who feels unable to predict changes in the market, I choose to continue investing, as I am able, in quality properties in quality neighborhoods throughout market cycles as they come and go. 

If the market happens to tank right now, just after my first purchase then... GREAT! I'm still super early in my professional career and that means that I'll be making more money and have more buying power in a downturn than I do now after years of appreciation. I'll be able to get some great cash flowing properties over the next few years and I'll have low equity in my first purchase.

If instead the market continues to swell then GREAT! My first investment is a success and I'll be able to take the cash flow and appreciation from that and put it into additional properties as opportunities arise.

So to answer your question, I don't think that my strategy will change very much depending on local market conditions. Definitely interested to hear additional replies to this awesome topic!

I have a single buy and hold property currently.  I have some money saved, and I save about $1200 a month towards my next purchase.   In my area rent rates aren't so much affected by the sales market, so as long as I buy the property at the right price so the rent makes sense... I will be okay on my current house and future ones.   But I wouldn't mind a downturn just so I could buy something! stuff right now is pretty over priced here.  

It's tricky, of course. Try not to be over leveraged.... that will bite you in the butt if values drop and you need to get out of, or refinance, a property. On the flip side, try not to have too much net worth in illiquid equity.... because then you can't take advantage of the buying opportunities from the down market. Will I get that balance right? As my  dad used to say, "God only knows. And he won't tell"

I was sitting on the sidelines during the last real estate downturn, but I wasn't entirely disengaged. At the time, I was renting, saving and fortunate enough to stay employed! I kept an eye on what the housing and renting markets were doing. Now, this is only my observation, but it appeared that as home values dropped, foreclosures increased and more people sought to rent. Confidence in the value of home ownership dropped. So...what would I do if the housing market dropped again? I would grab as many properties as I could get financed and get them ready to rent. I would also increase rents on any properties I owned as the demand increased. Ultimately, you can make money in any market, so the real key is not to overpay for the property, regardless of market conditions!

@Joe Villeneuve That was one of the best posts yet on BP!

@Scott Trench

and @Amanda Hoening I think that is the beauty of investing in rentals. You've either got more equity in an upturn or more buying opportunities in a downturn. I think the key is cash flow. As long as you can wait out the downturn thanks to positive cash flow you are good to go. What scares me is the idea of banks calling a portfolio loan in a downturn. I'm not up to ten conforming loans yet though so no big issue for me personally.

@Jean Bolger I like you Dad's quote, and good point about illiquid equity. 

@Keith John great stuff!

@Mark Shaffar

Hi Mark, 

I don't want to predict the market since I do not have the required knowledge to do so.

However, here's how I would prepare myself for a dowturn:

1) CASHFLOW, make sure all your properties are cashflowing a good amount. This will prevent you from not being able to pay mortgages and stuff.

2) LEVERAGE, I would reduce my overall leverage. Pay the mortgages you have without refinancing the properties to the maximum LTV unlike when you are in a growth phase.

3) RESERVE, I would put a % of my current income/cashflow into a risk free cash reserve, even if it is only 5%. 

4) MINDSET, in a downturn, you're equity will fall. You will certainly feel less comfortable and probably poorer but that doesn't mean to go and do crazy things to compensate the losses. Remember, equity is unrealized money. Even if you lose 20K equity on a property, it doesn't mean you have to do a risky flip to try and make up for it. You could lose even more doing so. As long as you're cashflowing, you still have that same asset which will appreciate again back to its current value after the downturn. That's why people lose money when the stock market crash. They see the value of their stocks declining, they are afraid and they sell for less than they paid. Then, everyone does so and it worsen the whole thing. Funny fact is, if nobody would've sold back during the market crash, there would simply have been no market crash. When people are afraid, that's when everyhing goes south. If you want a good read about this, go look for Franklin Templeton's story.

5) EXPENSES, if you believe a downturn is coming, forget about buying that Lambo you always dreamed of. Be smart, lower your expenses, it is not the time to get ''not required debt''.

Hope these 5 tips were useful.

Best of luck !

Kevin

I am hoping for another crash.  I will buy many more places then.  Not much available for what I think it is worth currently.

Originally posted by @Joe Villeneuve :

Keep cashing in my rent checks

 I love that answer.......lol

I'm right there with you, no plans to sell. However I do plan on buying when the market goes down again. There will be some great deal.

When the market cycles down again, I will continue to collect rent. I will also ramp up the buying. I see down markets (both in RE and stock markets) as opportunities. This is why I make sure we have reserves to weather the storm(s) and keep saving/increasing income so that we can take advantage of opportunities when they pop up. 

Originally posted by @Anthony Gayden :
Originally posted by @Joe Villeneuve:

Keep cashing in my rent checks

 I love that answer.......lol

I'm right there with you, no plans to sell. However I do plan on buying when the market goes down again. There will be some great deal.

I really don't or any other answer.  One of the reasons why you buy to hold is to protect yourself from a downturn in the market.

I wish I was positioned to buy bigger commercial income property in 2009-2010.  I plan to be ready next time we see those kind of prices.

Yup- keep cashing those checks!

We'll be looking to pick up more properties at that point and maybe some SFR we could hold and rent and later flip.

I'll probably also pick up a nicer vehicle at that point- just can't stomach the price of a decent sized SUV, even used, at this point but if it's like last time there will be people selling off vehicles CHEAP.

Along those lines, we will probably be looking for any tools we don't have currently, or upgrading what we do have, since people will be selling stuff cheap.

I think big market swings mostly affect the flipper or wholesaler RE investor.  Since I am a long term buy and hold investor I am more concerned about just making cash flow on my rentals.  The actual value of my home doesn't impact me that much and like another said if there is another round of foreclosures that just increases the tenant pool.

I will be buying rental properties aggressively if the market crash again.. Have seen a lot of success in other people doing so.. In long run, by long run I mean 20 to 30 years, you really can't go wrong with RE as long as the location is right.. 

I think what needs to be communicated is that real estate cycles do not all occur at the same time.

You have different lag times of recovery and peaking for residential, versus 2 to 4 unit duplexes to quads, larger apartment buildings, single NNN buildings, multi tenant strip centers, hotels, office, industrial, development etc.

Once you understand this there is usually some kind of possible opportunity to exploit in the marketplace.

Great buys in 2010 for commercial. You had to have a bunch of money and basically tread water after buying or throw out cash to make future equity gains. It wasn't about the going in cash flow as much.

There is still opportunities today. I am still a buyer out in the marketplace. I do agree you want to stay liquid to a degree to be able to capitalize. By analyzing metrics you can predict to a degree market movements within sectors. If you get in early before the herds you get the best gains. With low interest rates if a deal works then by all means look at buying.

Not a fan of crap pushed by banks on loans. Those only appeal to me on turn around properties where short term loans can work.

At least with larger commercial loans we can lock in rates. If the market shifts and you have long term debt locked in then just keep the cash flow going until the cycle makes the opportune time to sell again etc. 

Look for some SFR's in my target markets that will cash flow. Rent them till the market rebounds and then rehab and sell.
Originally posted by @Joe Villeneuve :
Originally posted by @Anthony G.:
Originally posted by @Joe Villeneuve:

Keep cashing in my rent checks

 I love that answer.......lol

I'm right there with you, no plans to sell. However I do plan on buying when the market goes down again. There will be some great deal.

I really don't or any other answer.  One of the reasons why you buy to hold is to protect yourself from a downturn in the market.

 I admire that you stick with the plan. I'm a buy and hold investor as well and sometimes it seems like the whole buy and hold strategy is forgotten by many looking to make a lot of money in a short period of time. It's not as flashy or cool and no one will make a reality tv show about it. 

Originally posted by @Anthony Gayden :
Originally posted by @Joe Villeneuve:
Originally posted by Anthony Gayden:
Originally posted by @Joe Villeneuve:

Keep cashing in my rent checks

 I love that answer.......lol

I'm right there with you, no plans to sell. However I do plan on buying when the market goes down again. There will be some great deal.

I really don't or any other answer.  One of the reasons why you buy to hold is to protect yourself from a downturn in the market.

 I admire that you stick with the plan. I'm a buy and hold investor as well and sometimes it seems like the whole buy and hold strategy is forgotten by many looking to make a lot of money in a short period of time. It's not as flashy or cool and no one will make a reality tv show about it. 

 Instant gratification (flipping) has its place for me.  I still do it, but as a way of adding cash lump sums (new seed money) to start another string of hold/refis...as many as I want...all from the same lump sum.

Flip to hold is the way to gold.

However, riches (flip lump sums) have a shelf life.  Once spent, it's gone for good.

Cash flow, wealth, if setup properly is the "shelf". 

Mark Shaffar Keeping this in mind I invest in linear markets and not cyclical markets. Regardless of what happens as mentioned above I will hold on and keep cashing in my rent checks.

@Account Closed good point on cycles not being simultaneous and thus allowing opportunities at different times. What crap being pushed by banks on loans are you referring to?

@joe B. sounds like a kind of medium term buy and hold. Interesting

When you get into commercial unless you are doing large balance properties a lot of banks push 20 year amortization with 3 to 5 year balloons and full recourse with 30% down.

Of course there are exceptions but these types of loans do not resonate with me. Great for the banks but basically chopping the investor off at the knees and crippling them UNLESS you have a value add deal where the short term loan doesn't matter as much.

I have seen others in the past on loan calls with short terms and it can get you in big trouble.

@Mark Shaffar - true, I would love to pick up another house at the price of a decent SUV, but I can't drive my kids around in it ;)  Then again, the kids all fit in the sedan now...

I'm more worried about the market going up and interest rates rising. If the market goes down I can buy more and borrowing gets cheaper. 

The downturn is where I can make the most money.

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