danger of buy and hold in a downturn market

1 Reply

Hi, BPers

I have a question on dealing with economy downturn for a long time and would like to pick the brains from experienced investors here (i.e., they experienced 2008 financial crisis themselves).

I heard many horror stories from podcasts in which those extremely successfully real estate investors who had been in the business for >30+ years were having very difficult time during 2008. I wonder what are the exact reasons to cause their suffering. 

Suppose that I have 10 SFH rentals with average mortgage payment to be around $700/month and they rent for around $1200/month per property now. They are purchased with 20% down and 4.5% interests fixed for 30 years. Suppose another financial crisis is coming in June 2018, what will be my major risks? I tried to list them here and would like to know whether I missed something or I completely missed the point:

(1) half of the tenants lost their jobs and cannot pay rents anymore, while in the mean time I need to spend thousands of dollars to evict them. Cash flow became a major problem. 

(2) The rental markets tanked significantly and even if I lowered the rent to $700 (to pay PITI), I still cannot find tenants for half of my rental portfolio. But this seems unlikely: According to what I read, rents usually are robust during economy downturn because less people can afford buying.

(3) Banks call due on my loans. How likely will banks call due on a residential mortgage with fixed 30 year terms?

What are other potential dangers for investors with leverages in an economy downturn? What are the best strategies to deal with them? I hope this post will serve as a starting point for new investors who have never experienced a major real estate crisis, to think more seriously about the hardships. We all know it is only a matter of when for them to come.  

Thank you in advance!

Lee

@Leon Lee   

I sold real estate back when the market crashed, but didn't have means to do much investing back then.  I think owning rental property is fairly safe in a down market /economy.  Not unless you are living in city that turns into a ghost town overnight... people will always need a place to rent.  Ofcourse, you might have to lower your rent to keep your properties full.  I do know for a fact though, that lending changes drastically when the market tanks.  If you have a balloon payment due on a rental in 2019, and the economy is down.  Then it will definitely be harder to refinance that property.  I experienced that personally on a triplex building in Clemson, SC years ago.   I think it's key not to spread yourself out too thin, and know that a rocky market will def come prob sooner than later.  Anyhow, just my take from a part time investor.  

Adam

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