REI Lessons Learned From the Great Recession

36 Replies

It's been said that those who cannot learn from history are doomed to repeat it. There's so much discussion out there about a possible crash, with many experts weighing in on both sides of the debate. My question in this post is NOT whether or not one will happen, but rather about what those of us who began our REI journey AFTER the crash can learn from those who experienced it firsthand.

So my question is directed to those in the BP community who were involved in real estate during the dark days of 2007-2009.  How were you involved, what happened to your business, and what lessons did you learn that we might benefit from?  I'm sincerely interested to hear your stories and any lessons learned that you're willing to share.  Much thanks and respect to all who do!

@Chris Jensen I didn't purchase my first home until 2012, which was the lowest point that Riverside, Illinois would get to. I got a great deal due to blind luck and timing, and I recognize that fully. I also was able to score a fantastic deal on my first investment property in Lyons, IL in 2015. Again, I was able to capitalize on the overall perception of investment properties at that time. Both sellers didn't really want to sell, but were in their 90's. If those same sellers would have held the properties for 4-5 more years, they would have recovered all the value from pre-crash times. The most important lesson I can take away from this is that there will be high and low times in REIA for ever. If you are well positioned, you will not need to sell for a huge discount. This means having systems in place as I age so that I am not the only cog in the machine.

Another lesson I learned at my local REIA in Berwyn was not to cross collateralize for speculative projects. One local investor who is quite well known in the community explained how he cross collaterlized multiple apartment buildings to purchase a piece of land in a great area to develop new homes. He got stuck when banks stopped financing, and he lost 44 million dollars worth of real estate. Most of these properties would have performed beautifully through the crash if they were not cross collateralized.

@John Warren , ouch what a painful experience for that investor, and a good lesson for all of us to learn from. There’s a line between investing and speculating that maybe gets more blurry and easier to accidentally cross when discipline is replaced with fervor. Great that you were “coming of age” as an investor at the right time. I’m glad you’ve had good success thus far. Thanks for sharing your experience and perspective. - Chris.

We started investing in 1993. Set everything up on 10 year mortgages. When the crash hit we were in a great position to survive it. Yes there was some pain, but a lot less if I had been on 30 year loans.

The other thing to consider is that we are buy and hold investors. Do to other reasons we started scaling back in 2004. When the crash hit we were in a better position than most.

So if a crash occurs, rent them. keep them rented and ride out the wave.

Have cash on hand to handle emergencies. Dont be over leveraged. Dont sell in down markets.

@George Skidis if I interpret your comments correctly, your strategy all along was to have your properties paid off in a relatively short time frame (10 years).  That gave you a healthy equity position in your properties.  And when the crash hit you weren't in a crisis mode.  Can you expound on the kind of pain you avoided by being on shorter term notes, as well as what kind of pain you did experience?

@Russell Brazil , key point about not being over leveraged. Such a dangerous position to be in at any time, especially when the cards start to fall. Of course I assume that when people and businesses are in the mode of levering up, they don't believe they're being dangerous. I even heard it said one time that equity is where smart money goes to die. But there's a magical point where smart levering crosses over into foolishness and becomes down right dangerous. What advice do you give your investors to help keep them on the right side of leverage?

@Chris Jensen Im of the mind that this whole idea of buying with no money down is very risky. I buy with 25% down on all my properties, and I buy in areas with strong demand so that my value gets pushed up and my rent gets pushed up. So my properties Ive had for awhile now have close to 50% equity. So if my values get pushed down, no big deal.

The loose criteria to fund money will not likely to happen again. In our area, the largest employer Apple did not even have layoffs. High tech workers were mostly spared. The people who got burned were service workers, and risky takers. A gardener who's wife is a house cleaner went to flea market talked to the street loan persons with $150K stated (gardener) income getting rentals. These who had risky interest only, Adj loan many got caught and were often burned. 

I saw the dark side of people. People who can afford deliberately stop paying mortgage to get out of bad investment.  A few bought notes (1st mortgage) thinking they own the estate found out the people who sold them the notes changed the names on the title to theirs and fled.

This happens more on property managers who manage and pay mortgage for out town investors. They collected the rent but did not pay mortgage and changed the title sold to others and disappeared.  Asset managers forced realtors to put very low value so they get the first crack. Some got caught many got away. 

Those leveraged much thinking that was lucrative. Thinking getting something for nothing down are likely to experience the most pain. During last recession a well paid developer was laid off. He went to a gun shop came back to his work place shot his manager, president and HR director on account of his multiple investment properties he could not afford. He has another quarter of century sentence to serve over stupid rentals that he should not possess. 

Some will learn many will fall into the future traps.  

@Sam Shueh , crazy stories and lots we can learn from them. Terrible to hear of the darker sides of people that manifested themselves when things got bad. Some out of pure desperation, some out of lack of honor and human decency. Tweetable quote, "Some will learn many will fall." Thanks for sharing.

I bought a couple rentals long term holds in Oklahoma in 2004 & 2007. When the market tanked my rents went up & I improved the properties to raise & protect them even more. So I made more money during the crash & set me up to do syndications down the road & now buying mobile home parks & silver to prepare for next recession.

@Matt Millard so that's interesting. In a down market you were able to raise rents. Is that directly due to the capital improvements, or was there another phenomenon at play? I've wondered, during a downturn, when fewer people can no longer afford to buy, if demand for rental homes increases leading to raising rents. Did you notice anything like this in Oklahoma?

@Chris Jensen I managed bank owned properties. I bought homes for 5k, rehabbed with my own 2 hands to minimize out of pocket expenses. Now those same properties are worth 50k each minimum. Sounds crazy but those were my best times. Buy low sell high. I still buy pick and choose good deals now. But I'm waiting for this bubble to burst so I can splurge again. Millionaires are made in hard times.

@Frank Wolter that's very interesting. "Those were my best times" yes, that does sound crazy. But it also sounds like you were very smart with your money, such that when deals were plentiful you were in a strong position. Great thoughts, thanks for sharing.

@Chris Jensen

I started buying investment properties in 2006, have done about 100 deals since then, and haven't had a losing deal EVER. I'm a more conservative investor than most, and that's stopped me from doing some deals that would have made me money.. but it's also meant that I've never lost money, and I'm just fine with that. Here are some lessons that young hopeful investors don't want to hear.

1: Despite what you've seen over the last 8-9 years, prices can move in more than one direction.  If your model projects (and worse yet relies on) consistent value increases in order for your numbers to work, you very well may end up with a problem.

2: Rents can also fall (gasp!). If you've leveraged yourself out maximally, refinancing your property every chance you get and keeping razor thin cash flow might result in negative cash flow if things turn. This is also likely to be at a time when the economy is poor and your own day job may be in peril. Would you be able to feed all of your units monthly under such a circumstance?

3: Don't get caught up in mania. It's the nature of markets that once nearly everyone is in agreement that something is a good idea, it's probably about time to take the other side of the bet. You have to ask yourself.. who is left to buy? When your hairdresser, gardener, and grocery bagger are all becoming property investors it may have jumped the shark. Anyone else feel this happening again right now?..

4: Don't get involved in something you don't fully understand. This is a corollary to #3, but it's easy to see others seemingly doing well with something and want to jump on board. It's better for you to miss deals while you educate yourself than to get involved in a deal that turns out to be a loser. It's especially true for your first deals that they absolutely must be winners. Messing up on your 50th deal will probably not kill your investing career. Blowing up your first or second or third deal just might.

@Chris Jensen we have over 38 homes and 6 apartments currently. All free and clear. Totaling over 122 doors. I'm going to start a You tube channel. I'm going to spell out my tips and advice as well offer my investment opportunities. Look out for it it will be on my page

Oh, wow. What did I learn?

I got into rehabbing well before the crisis, and in the one country where market conditions most exacerbated the highs and lows of the real estate market. After two renovations in other properties, I sold my own apartment in 2007 through an incredibly complicated series of contractual maneuvers designed to skirt EU  banking regulations, and the bank was as in on it as the buyer was.  I had no choice but to go along or not sell our house, because EVERYBODY was doing it.

The Greeks in Greece never thought the bottom would fall out of a rotten society. Everyone who knew better, who had lived outside Greece and understood that nothing as thoroughly corrupt and also as fundamentally weak and helpless as Greek society survives long, was dismissed with a small smile as naive, as a dreamer, as little boys crying wolf.

I was told dozens of times to stay in Greece by the Greeks there. I had a good job. I was getting into real estate. No reason to leave, really. 

When the crash came, I predicted on FB that by the time this was over, the Greeks would be kissing the whips of their financial overlords after each beating and congratulating each other on having the wisdom to submit to such masterful masters. Lost plenty of friends for it. And that's exactly what's happening now, and will continue to happen for generations, as the EU successfully manages through economic policies to breed the Greek population down to small-enough numbers to sustain itself on an economy based on specialty agriculture and tourism.

So this is what I learned: no matter what your business strategy is, you are never going to successfully cheat the piper forever. Sooner or later, the piper gets paid, one way or another, and quite literally, all the worst payments extracted involve their children doing the paying for cheaters.

Debt can be used to crush a nation, a business, a person who makes himself or herself a target. And when debt is most successfully used, it will make you grovel first and ask questions later.

When you lie down with dogs you get up with fleas.

Just because "everybody else is doing it" doesn't mean your a$$ is going to sting any less from the beating you will receive along with everyone else when the times comes.

God preserves fools and drunks, but he hates cheaters. He hates them forever and with an extraordinary malice.

Never trust anyone's complicated math telling you how you're going to make money with their system. Never trust anyone who confidently tells you they've figured it all out.

Bankers will screw you given half an opportunity. It's their nature.

Help never comes without strings attached.

Originally posted by @Chris Jensen :

It's been said that those who cannot learn from history are doomed to repeat it. There's so much discussion out there about a possible crash, with many experts weighing in on both sides of the debate. My question in this post is NOT whether or not one will happen, but rather about what those of us who began our REI journey AFTER the crash can learn from those who experienced it firsthand.

So my question is directed to those in the BP community who were involved in real estate during the dark days of 2007-2009.  How were you involved, what happened to your business, and what lessons did you learn that we might benefit from?  I'm sincerely interested to hear your stories and any lessons learned that you're willing to share.  Much thanks and respect to all who do!

 Great discussion question Chris. Thanks for starting this dialogue that all of us newer investors or soon to be investors can benefit from!

I have been investing in Real Estate since 1997.

I have went through a few downturns even before the 2008 crash, such as the Tech Crash of 2001 where NASDAQ lost 66% of it value.

My properties are in NYC, Brooklyn specifically.

I tend to be a very detailed oriented researcher into the area of Investment that I am studying.

Prior to purchasing my RE Investments, I learned the RE Business Cycle so that I can soften a blow from a downturn as much as possible. That's because I'm very risk adverse.

I learned that everything is a business cycle. It goes up, peaks, goes down, bottoms and then goes back up again.

HOWEVER, while it is a business cycle, most people only think of it as simply a cycle that moves against a horizontal line. They don't realize that the cycle can move against an inclined line.

What do I mean by an inclined line for a business cycle? Well, imagine a line that is inclined upward. Draw a Business Cycle along that inclined line and then you will see that when the cycle turns down, it is muted. When it goes up, it skyrockets.

Many areas of NYC is exactly like an inclined Business Cycle.

Equally, there will be areas that are declined in a downward direction. Those will exhibit the opposite of an inclined business cycle.

I believe that an Investor can intelligently determine whether then business cycle will be inclined, declined or just horizontal by understanding what happens to their particlar neighborhood during the down cyle part of the business cycle.

For instance, in the downturn, it is normal for Cities to lose money, and therefore cut services. The first service they cut is usually the Fire Department. Then the retire older and more experienced Police Officers, then Teachers.

So, you would expect more burned out vacant buildings, increase in crime and decrease in the quality of schools in neighborhoods that cannot make corrective measures. Generally, these will be lower income neighborhoods which already had problems.

BUT, for those neighborhoods which had a strong support base and higher incomes, they could afford to have a volunteer Fire Dept, hire private security to drive the neighborhood, and keep the quality of their education for the kids up via private schools, which are generally expensive.

When the down turn happens, richer families which sought to save money and chosed to live in the lower income neighborhoods, find themselves leaving the lower income neighborhoods and moving to the safer, higher income neighborhoods. This movement has the effect of making the lower income neighborhoods worse and keeping the rents stable in the higher income neighborhoods.

ANYWAY, to make a long story short as there is MUCH more to add to this analysis, this particular effect made the financial crisis of 2008 barely noticable to my properties as they all were within the higher income neighborhoods.

In 2007, the values of my properties had peaked. From 2008 to 2009, the value had decreased about 10% but the rental income stayed the same.

From 2009 to today, all of my property values doubled if not trippled.

There is a reason why I'm willing to buy in the higher income neighborhoods in NYC. The RE Business Cycle is inclined upward, softening the effects of the downturn while moving quickly up when times are good!

Hope that helps.

While I did have the opportunity to make a few purchases during the downturn, I regret not understanding how to do more. I learned that during a downturn is truly when real wealth can be created, BUT; you need three things in order to actually make something happen:

-Knowledge: understanding your market and recognizing an opportunity

-Cash (or access to cash): Banks don't take chances when the market is down. 

-Network: A network of investors and partners who can and will work with you to identify and acquire assets. 

I am working now to build up all three of the items listed above. I am not sitting back waiting for a crash, and it's silly to think anyone can predict that. My goal is to always be in a position to take advantage of an opportunity when it presents itself, regardless of whats going on in the market. I feel like I have a good understanding of my area and opportunities pop up all of the time, but if you don't know that it's an opportunity, you'll miss it. 

@Jeff Cagle Yes, at times I think everyone is getting into real estate. It's funny because I stopped talking about mt plans with friends and family because then everyone was/wanted to jump in. I think some of this is due to all the tv shows that show flips, rennovations etc. The reality is everyone is not getting in on real estate though it may appear that way at times. I just have to work my own strategy. I can't concern myself with what others are doing because then I'm distracted.

I learned during the last down turn that investing in SFHs was a much higher risk than multi units. Multi unit properties maintain their value based on rental income/cap rates which do change but are not driven by home buyers. I am a income investor relying on appreciation driven by rental rates. 2008/2009 had no impact on my business

For SFH investors owning free and clear is safest protection against losing the property however it comes at the price losing your cash/equity. I prefer to have significant reserves in diversified invest easily accessed as opposed to dead equity I can not control or access during a down turn. For me cash not earning it's keep is not acceptable.

If I were presently invested in SFHs, which I am not, I would be selling now at the present high of the home owner market and reinvest in multi unit/apartments.