How Should I Prepare For a Market Crash?!

40 Replies

Hello All,

I've been doing a ton of research on the 2008 market crash.  I feel like I've garnered a strong understanding of what happened and why, however there is one thing I feel I am missing.  What steps could a small-mid level investor such as myself (Own 6 duplexes) have taken to prepare for such a market crash?  I would like to be prepared in the eventuality that a similar crash happens, even if its not as big.  Thanks in advance for the advice!!

Kenneth Scarbrough

@Russell Brazil  I understand your sentiment completely and thank you for responding.  Aren't there other affects though? If housing prices come down, so do rents.  Also, if its bad enough, less people are able to pay there rent due to job loss etc.  I don't presume to understand all of the mechanics behind a crash like that, its just hard to believe that weathering a crash would be that easy.  Your thoughts? 

Rents rose during the housing collapse, significantly in many locations. Weakened demand for purchasing typically equals higher demand for renting.

If you have a reasonable equity already you should survive with 11 or 12 tenants paying for your housing.  The story is different if all 11-12 sources have no income at same time and they all work for the only major employer.  That is another reason many landlord like civil service employees. If you have no other income, there can be complications which mortgage you need to pay first. In your case I assume you have 7 mortgages.   Last do you have 6 months reserve to survive?

Ways to mitigate risk in a down turn -

Manage debt..leverage

Ensure you have a buffer/equity 

Sell some properties in a rising market, no one ever goes broke taking a profit. Reduce debt so it is manageable.

Its all about cash flow. If you have enough cash flow to service your debts, and cover contingencies, then your equity is almost irrelevant.  You need to "stress test" your portfolio. How do you answer questions such as:

  • Do you have any variable rate debt? If so, what would happen if the rate on this debt increased by 2,3,4,etc %. How much of an increase can you still cover, and is that amount of increase realistic to happen over a short period of time (say, 2-3 years)?
  • What would happen if several of your tenants lost their jobs & couldn't pay the rent, you had to evict and had trouble finding qualified renters? 
  • Do you have the cushion in your cash flow to cover an extended period of vacancy in several of your units?
  • Does you profitability depend up on any sort of refinancing in the next few years?
  • What would happen to you if market rents in your area fell by 10%?
  • What would happen if YOU lost your W2 income/job?

Are you confident that you could ride out any of these events happening, and still be comfortable?

@Sam Shueh Thank you for the response.  I do have 6 months reserve, and I think I have a decent amount of equity built up.  However, I do plan on scaling up as quickly as I safely can (looking into commercial) hence why I am doing research and trying to prepare for the eventuality of another crash. Would what you say differ for someone who owns 30-40 units?

@Marisa R. I put down %25 on the majority of my investment properties.  That in a sense is managing debt and building equity simultaneously correct?  Also, I'm favorable to buy and hold properties to build cash flow as opposed to selling, would you say that is an inefficient investing strategy? 

@Ryan D.  

1) All fixed rate

2) It depends on the percentage of tenants lost and for how long, but I think I could weather it with reserve cash.

3) I could cover roughly 50% vacancy per unit (in general one side pays most of the mortgage and the other is profit.)

4) No need to refinance

5) I would lose cashflow but still make my mortgage payment and be in the positive

6) I would weather it with 6 month emergency found, no rent payment due to house hacking, and cash flow from my properties. 

I could ride them out, never comfortable losing money but I would be ok.  It would depend on the severity and length of time of the conditions listed above.  

From my point of view we have at least 6.5 years before anything negative could happen in our growing economy and that should be enough time to get your ducks in a row

@Ken Scarbrough All of the above is a good hedge. I also believe in diversification. If you had bought gold prior to crash you would have killed it. Equities and REI in bull markets. Gold, Silver bullion and cash for bear markets. Also avoid class A rental units for now till bear market returns. Build up a LOC, banks are allowing you to open up non-collateralized personal lines for cash reserves at 8% APR for those that have +800 FICO credit score at 0$ cost. For last resort to draw. Keep or get a W2 income job, so you can buy up when there is blood on the streets :)

A crash is likely to improve your cashflow, just make sure you can't get in a position where you would need to sell.

In my market I also noticed that post crash people were so burned they vowed they would never buy again. So now people are paying $1000 a month for a house they could own for $600 a month. It increased the rental pool significantly with no signs of abating. so another crash will hopefully exacerbate that "problem" as well :-).

@Ken Scarbrough I thrived and was my best years during the market crash. I bought bought bought. My advise from my billionaire mentor was way off all mortgages or sell to pay off what you can. Try to be debt free. Reserve funds and be ready to buy. There is no question to me that is about to happen. No income verification loans throws up a huge signal that we don't learn from our mistakes. Good luck
@Ken Scarbrough like I mentioned before. In my area housing prices did fall but rents didn't move. But if your talking a such a collapse like people loosing jobs then there realistically is no way to protect your investments from that. You could sit on some money but then again if the dollar drops that will work against you as well. I don't know how far of a collapse your referring to but my initial referral was just a housing collapse

At this period in time, I think you need to have a long-term mindset if you are interested in holding RE or stocks. If you are interested in selling in the next 5 years you must get out now! Commercial rates are rising which is going to cause more investors to hold off on buying at these levels. Fixed Rate mortgage rates moving higher and higher everyday. Some investors are going to reset on their 5 Year ARM's.

I think you are fine to manage this next downturn as you are not in a market that doesn't increase or decrease that much (the midwest). I am not going out and buying more homes or stocks right now. Once there is more inventory on the market AND after the market turn higher then I will be buying. Inventory is so low right now that homes are getting unaffordable for a lot of people. I don't believe they will be buying homes in a declining market, they will be renting!!

I am not a market expert. I do believe we will have a national recession at some point. Make sure you have enough cash & equity on the sidelines to weather any financial storm. 

If I am wrong then you are in a good position right now to collect more rent income as more homeowners lose their homes (when they lose their jobs). There are a lot of people stretched to the max right now with loans including student and auto debt aside from their mortgage debt. 

There will be more money printing (QE) and stimulus. The Federal government has been doing this over and over again. There will also be more opportunities to buy after the market turns higher.

Don’t over extend yourself and don’t sell your properties. You’ll be fine. Look to get deals undervalued that way if there’s a crash and it loses value you’re still ahead. 

Originally posted by @Stanley Crawford :

I think in one of Brandons youtube videos he talks about his Heloc's being shutdown during the crash for no reason.  That may be something to think about.

 Helocs for SURE can get frozen and called.. make no mistake about that.. I bailed many a flipper out in 08 who were counting on helocs to carry the day only to have them frozen like the North pole ( pre global warming.)

Originally posted by @Frank Wolter :
@Ken Scarbrough I thrived and was my best years during the market crash. I bought bought bought. My advise from my billionaire mentor was way off all mortgages or sell to pay off what you can. Try to be debt free. Reserve funds and be ready to buy. There is no question to me that is about to happen. No income verification loans throws up a huge signal that we don't learn from our mistakes. Good luck

 Even though you see no income verification advertised.. just try to get one.. as opposed to the massive amount NO doc no verf loans that were being written pre 08.

markets were rentals were lost in droves were mainly in PHX  Vegas FLA  GA  and central CA... were the economy was very much based on new construction.. in the rust belt new construction does not drive the markets.. as existing homes are selling for less than replacement cost.. until that inverts I don't think in those cities.. Indy included that a total melt down like those other areas experienced is in the cards.

the bigger risk to failure in rentals is just burnt out landlord syndrome and those buying thinking they have solid performing tenants when in fact they have horrible tenant pool in their area and the tenants cause consitant loss's for the landlord which creates this burntout landlord syndrome and erosion in pricing..   Quality rentals in the top 1.3 of the rental pool or class in any of these cities to me is pretty solid.. but if your buying duplexs in the hood in Indy then you do have some risk.. 

The issue here isn't the total price of the house but the availability of capital for those trying to purchase the house. The price of the house dropped because people can't get mortgages to buy said houses. Even at significant price reductions, people usually still can't afford cash purchases. A.K.A, their only three options are moving in with family and friends, homelessness, or renting. Which is why rents rose, because of the larger demand for them. 

Originally posted by @Ken Scarbrough :

@Russell Brazil wouldn't lower housing prices and higher rents cause more people to want to purchase a home instead of renting? Therefore Lessing the pool of renters