How to survive an Impending Depression

27 Replies

My husband and I are getting into buy and hold real estate investing and are planning on BRRRRing properties. The renting market is in an incredibly high demand in our area, but we are in a small town.  When talking to friends, family and even to each other we keep getting asked and asking ourselves "How would we survive this depression, or crash everyone keeps talking about!" We have small children so it's only natural we as well as our family is very concerned with what we have just embarked on. If your leveraging your properties to buy more and all of a sudden we do have a crash, people cant afford what they used to. You no longer have rent coming in to pay your mortgages, without a way to really fix it.   

Is this just the downside of real estate investing? Is there another idea or something that we haven't thought about? We were 100% set and ready to go and about to buy our 1st property, but family keeps asking us this question and without a good answer I dont know if we can move forward.  If you cant answer to yourself how do you answer to others. 

Any insight would be incredibly helpful.  We may just be overthinking this. 

  1. Good locations
  2. Add value
  3. Cash flow
  4. Long term debt
  5. Reserves

Works for all market cycles.

Buy in locations where the risk of not being able to pay the mortgage for extended periods of time is zero.

Buy right. Have cash reserves. Stress-test your worst-case assumptions (other than the zombie apocalypse, which no one can predict). Get comfortable with your numbers. Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view. 

@Samantha Swenson

1. Don't invest money you can't afford to lose. 

If you put yourself in a position where you have to answer any and all questions that family members may have then you'll never invest. Answer the question "why we want to invest", have goals associated with that why, and make a plan to reach those goals. Don't let anyone get in your way. 

@Samantha Swenson

The question is what is your risk tolerance? If you answer zero, then put your money in the bank and get .1 or 1%. 

The is the exact question my millionaire sister who works at google, told my wife when she asked how do you become rich. 

You use the word depression. Either you are thinking worse case scenario like the 1930's or you are a pessimist. The more probable is a recession. 

I believe in a buy, hold, and sell strategy. I bought 4plexs in 2013-2016, great cashflow, and even greater appreciation. The RE market is still going up, and would say safe to Dec'18. Probably still good in 2019, and then not so sure in 2020. Will need to re-evaluate the economy, stock market, interest rates, unemployment, jobs, case shiller, consumer confidence. When the slightest sign of downturn, I will sell. Build a large warchest, and then buy on the low.

Terry

Since the beginning of the 20th century we have had 1 depression, and 2 housing collapses, and those housing collapses were 75 years apart.  So Id spend my time worrying about things that are much more likely to happen, like needing to replace a roof, than worrying about things that are unlikely to happen.

And for those that survived the most recent housing collapse...the solution to surviving it was rather quite simple....dont sell during a downturn.

I do a Mental Rehearsal before starting a project.

What do I do if X should happen? What do I do if Y should happen? Then if X or Y happens, I've thought through the matter ahead of time rather than trying to figure it out as the crisis unfolds. I involve other members of my team to get their input and make sure we're all on the same page.

As far as a depression coming, it might occur or it might not. Clairvoyancy is a skill I don't have. What I can do is ask myself how I would survive hard times. I also realize if the times become too hard, I'm going under no matter what.

I find it OK to think through bizarre scenarios. My friends were amused when I wondered how I would deal with the loss of my Internet connection (which could be serious when doing online investing). A week later, a service technician at Amazon Web Services threw the wrong switch by mistake and half the Internet went down for a few hours (AWS says changes were made to prevent this from happening again). Because I had thought through the possibility, I was not affected.

Have reserves and don’t over leverage

Fear is
false evidence appearing real
Don’t let fear about the unknown future events make your decisions for you today

@Samantha Swenson my first concern is who are you taking advice from? The economy will have cycles up and down, but there is no indicator that an event as serious as a depression is coming. Whoever is telling you a depression is coming is not basing it on economic principals. 

When entering real estate you will find lots of negative people trying to talk you out of it. They are uneducated on real estate, so their advice is usually horrible and works against you. 

Here is what really happens when the economy suffers. During the great recession a few years ago, there were more renters and my rents increased. Although housing prices went down, it had a positive effect on rentals. People need a place to live, even when the economy is bad. Also keep in mind even if unemployment reached crazy highs list 10%, there is still 90% of the population working. 

Originally posted by @Mike Dymski :
  1. Good locations
  2. Add value
  3. Cash flow
  4. Long term debt
  5. Reserves

Works for all market cycles.

Buy in locations where the risk of not being able to pay the mortgage for extended periods of time is zero.

Mike, I have had this same question in the back of my mind as we are about to close on our first property. You have calmed those fears with this post as I can check all the boxes. Thanks.

Originally posted by @Russell Brazil :

Since the beginning of the 20th century we have had 1 depression, and 2 housing collapses, and those housing collapses were 75 years apart.  So Id spend my time worrying about things that are much more likely to happen, like needing to replace a roof, than worrying about things that are unlikely to happen.

And for those that survived the most recent housing collapse...the solution to surviving it was rather quite simple....dont sell during a downturn.

 Sir, I have to commend you. Your responses are always so sensible.

Great question. One that most of my investors ask. I buy SFR for buy and hold. I only buy homes that are in safe blue-collar neighborhoods. When the economy is up people are moving out of apartments into my homes. When the economy is down people are moving down into my homes. I only buy if it cash-flows now and there is enough delta in the mortgage vs lease payment to whether any storm. Plus, I don't care if the economy slows down because I don't plan on selling during those times. Matter of fact, when the economy takes a hit that's when you need to buy!

I echo @Joe Splitrock in asking who is telling you a depression is coming? I would encourage you to educate yourself. There are many market indicators that you could watch to help give yourself an idea of the direction the market is heading in. 

I would be curious if any investors could speak to the impact that the recent recession had on the rental market. Did it hurt or help keep their properties rented? I’ve not had a chance to research the percentage of households that were renting at the end of the recession as compared to before to see if there might be a potential benefit to having rental property in a period of time when people are not buying homes.

Good luck with the first property!!

Originally posted by @Adam Departee :

I echo @Joe Splitrock in asking who is telling you a depression is coming? I would encourage you to educate yourself. There are many market indicators that you could watch to help give yourself an idea of the direction the market is heading in. 

I would be curious if any investors could speak to the impact that the recent recession had on the rental market. Did it hurt or help keep their properties rented? I’ve not had a chance to research the percentage of households that were renting at the end of the recession as compared to before to see if there might be a potential benefit to having rental property in a period of time when people are not buying homes.

Good luck with the first property!!

During the great recession, home ownership went down and rentals went up. It is logical if you think about it. If you don't own, then you are renting. Some people stayed with family or got roommates, but ultimately no matter what happens to the economy, people need a place to live. I owned rental property back in 2004 when home ownership levels peaked. It was harder to find good tenants when we had record high home ownership, than it was at the bottom of the great recession. 

A bad economy is actually good for investors. There are better buying opportunities and more renters. The great depression created more millionaires than any other point in history. It was a major buying opportunity. 

When the economy goes bad, investments can be had at a discount, but people run scared. Everyone runs from the stock market and runs from real estate. It is herd mentality that people buy high and sell low. As crazy as it sounds it is basic human behavior. We are born with a fear of falling and we run from danger. The smart people who don't run are the ones who get rich.

Originally posted by @Aaron Johnson :

You could always do what some family members of mine do, build a dry-food stocked cabin in some remote location.  That's one way to survive a total economic and societal collapse.

My cousin is doing the same thing. He told me bullets and food will be the new currency. Maybe he is right, only time will tell. I am choosing a different investment path that assumes a more optimistic future.

Originally posted by Account Closed:
Originally posted by @Russell Brazil:

Since the beginning of the 20th century we have had 1 depression, and 2 housing collapses, and those housing collapses were 75 years apart.  So Id spend my time worrying about things that are much more likely to happen, like needing to replace a roof, than worrying about things that are unlikely to happen.

And for those that survived the most recent housing collapse...the solution to surviving it was rather quite simple....dont sell during a downturn.

 Sir, I have to commend you. Your responses are always so sensible.

 That's because he stayed at a Holiday Inn Express last night! :D

Originally posted by @Joe Splitrock :
Originally posted by @Aaron Johnson:

You could always do what some family members of mine do, build a dry-food stocked cabin in some remote location.  That's one way to survive a total economic and societal collapse.

My cousin is doing the same thing. He told me bullets and food will be the new currency. Maybe he is right, only time will tell. I am choosing a different investment path that assumes a more optimistic future.

 LoL. The thing that cracks me up about that strategy is: if it's true, there's not going to be enough bullets or food for it to matter. To me it's like trying to figure out what to duck underneath to survive the nuclear blast. 

Originally posted by @Joe Splitrock :
Originally posted by @Aaron Johnson:

You could always do what some family members of mine do, build a dry-food stocked cabin in some remote location.  That's one way to survive a total economic and societal collapse.

My cousin is doing the same thing. He told me bullets and food will be the new currency. Maybe he is right, only time will tell. I am choosing a different investment path that assumes a more optimistic future.

 I never understood planning on the eminent failure of the economy/society.  If it happens we will have a lot more to worry about than how to pay for our next vacation... but it isn't enjoyable to live in that fear.  Barring another Great Depression that shuts down the big banks or worse, I think having a big enough nest egg will allow weathering almost any storm.  

To each their own, I guess! 

@Samantha Swenson I get asked this question all the time.  I even get people who think I'm silly to own so many rental units.  They literally tell me I am going to risk everything as soon as the market goes down.

The fact is I mainly invest for cash flow, appreciation is taken into consideration but, I don't bank on it.  If there is a market crash and all of my properties lose value.... I should still be cash flow positive.  There is reason to believe I would even increase cash flow if more people start renting and less are buying homes.  No matter what happens to the value of my properties I still have renters paying the mortgage.

To me there is more risk in what is happening with the  rental market.  Are they building lots of new housing that I am going to compete with?  Did I buy in a neighborhood trending in the wrong direction that people no longer want to live in?

These are all questions that I need to answer and account for before I start trying to predict what is going to happen to the market.

Lastly, the individuals giving you advice probably have their entire life savings tied up in the stock market.  What are they going to do if they are 1 year away from retirement and the market crashes?

Originally posted by @JD Martin :

Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view

Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view

Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view

Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view

Don't let naysayers that have no numbers and no information other than news sound bites scare you from pursuing things that make sense from a strictly financial point of view.

THIS!  One hundred times over.  And over again.

Do NOT listen to friends and family. I sure don't, because none of them own real estate investments. I lived in CA when the housing market crashed. Many went from owners to renters. The renters will always be there. Not everyone can just move in with their parents or friends. Those that got burned were way way way over leveraged, and many on interest only loans with no way of paying the principle. I currently have properties on long term fixed rate mortgages. Market crashes? The rent still pays my mortgage. I just won't have as much equity. 

@Samantha Swenson

I think this question is more complicated than many give it credit for but most on these boards are heavily invested and thus have their outlook which is not necessarily wrong but can be a little more on the positive side. 

I think all the comments here are good. Buying right at decent prices with cash reserves and cash flow so you can wait is key.

One thing I think its important to point out though is that no one says they will panic in a bad situation but thats so much easier said than done. Everyone says they want lower prices and will just wait but its never that easy. 

Fact is when things go wrong its normal to doubt your decisions and think what if I was wrong especially if your net exposure is very high (i.e. you have $1MM in properties say but only have $100K in equity and/or cash put aside thus your net exposure is high). Its very tough to say put in $20K when your property gets trashed by a bad tenant or your roof just happens to need updating and you are sitting there thinking your properties are now not even worth what you put in. As another example when half the houses on the block are in foreclosure tough to look at your property and see roses and sunshine. Also, not all areas go up in value all the time, some areas will do good, others will get worse just the way things work. Its not assured you should just hold on always and forever.

In short, RE is much like other forms of investing. Getting overextended is generally bad, investing all in one area is a risk and temperament to be able to put aside cash for bad situations and to reassess where things are during really bad times is very important. Its a marathon not a sprint and you need to always be learning. I have learned this all the hard way.

Lastly, there is always some way to get involved and learn. If you can't get comfortable doing that kind of leverage than don't. Put a little more equity or find more creative ways to spread the risk. There is often a way and just throwing up your hands and giving up is rarely the only thing that can be done.   

Really, reserves and access to capitol are key.  You have to be able to survive depressed rents in a down market to avoid being forced to sell when the market is down.  If you have money in the bank or a source you can pull from, a down market is not going to affect you.  As others have said as well, buy at the right price, in a good location and you should be fine.  And recessions are rare.  Don't hamstring yourself due to fear.  Research enough to feel comfortable with a certain amount of risk and go out and conquer your market!