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

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here