How Should I Prepare For a Market Crash?!
Indianapolis, IN · Member since 2014 · 46 posts · 12 votes
How Should I Prepare For a Market Crash?!
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Rental Property Investor · San Jose, CA · Member since 2013 · 188 posts · 228 votes
7yIts 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?
40 Replies
- Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes7y
What Ryan D. said.
It doesn't matter if you have 4, 40 or 400.....it's still the same. With duplexes in Naptown, you're already on the right track. I'm willing to bet that if your rents dropped 20% you'll probably still cover mortgage. It's the guy in Miami with a $500k home collecting $2500/mo rent that should be concerned about the market turndown. - 7yEllis HammondPro MemberInvestor · Leawood, KS · Member since 2017 · 178 posts · 108 votes
@Ken Scarbrough three rules
1. cash flow
2. long term debt
3. cash reserves.
If you have long term debt on your property and strong cash flow then sit back and relax, you have done well to prepare.
As far as market crash goes for MF, there was less than 1% default on B class large MF in 2009 (the crash). Why? bc in a downturn ppl still need affordable places to live. It's the luxury stuff that takes a hit first (ppl can do without a jacuzzi hot tub when they can't afford their groceries).
If you are looking to get into large commercial, have you considered investing passively first? it will give you an idea of how it works plus give you some credibility with brokers/lenders when you go out to look for your own place.
- Investor · Paso Robles, CA · Member since 2016 · 106 posts · 31 votes7y@Jay Hinrichs Hey Jay, great point. When you say Indy included. Do you mean it’s susceptible to be hit as Ca, PHX, etc. the reason I ask is I’m running numbers on a purchase of a 4 plex in Indianapolis. I’m wondering if Indianapolis has already exhausted its potential. All my other properties in Kansas it’s, Mo have higher cash flow. The issue is it’s more difficult to find deals in Mo now. This is what caused me to look elsewhere. If not Indianapolis, where do you suggest. I was looking at the Buerau of labor statistics and there are other areas with higher job growth but the barrier of entry to get in is more expensive per door. I love the Midwest, better deals all day long but not as easy as it used to be.
- Professional · Brooklyn, NY · Member since 2016 · 1 post · 0 votes7y@Stanley Crawford yep. Happened to me and nothing wrong with my credit. Out of thin air. Unpleasant
- Rental Property Investor · Will County, IL · Member since 2018 · 39 posts · 11 votes7y
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
In a bear market, as a consumer/renter, would you want to risk purchasing a house, even an inexpensive house, if you weren't sure if your job would be around in the next year? Renting appeals to a lot of people as "safer" in a down economy, because they don't have to worry about losing their house in addition to their job, and they don't have to worry about their house losing value. Of course, there are people that don't see it this way, but a nice amount of them do.
Also, I try to avoid watching doom and gloom news. The real estate market does not behave the same way as the stock market.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Marcello Oliveri:
@Jay HinrichsHey Jay, great point. When you say Indy included. Do you mean it’s susceptible to be hit as Ca, PHX, etc. the reason I ask is I’m running numbers on a purchase of a 4 plex in Indianapolis. I’m wondering if Indianapolis has already exhausted its potential. All my other properties in Kansas it’s, Mo have higher cash flow. The issue is it’s more difficult to find deals in Mo now. This is what caused me to look elsewhere.
If not Indianapolis, where do you suggest. I was looking at the Buerau of labor statistics and there are other areas with higher job growth but the barrier of entry to get in is more expensive per door. I love the Midwest, better deals all day long but not as easy as it used to be.
no i dont think that new construction leads the market in Indy its pretty diverse.. the major risk to me or my opinion is not the market per se its buying low end hard to manage tenants that is where i see the risk in the mid west rust belt deep south cash flow markets.
top 1/3 of the renter pool is as solid as anywhere.. like i said the melt downs in the GFC were in the areas were new construction was a major driver.
- Lewisville, TX · Member since 2015 · 341 posts · 264 votes7yOther than advice given about cash flow being high, good tenants diverse employment & reserves I would say consider passive investing in mobile home park syndications & to take a portion of reserves & buy precious metals!
- Rental Property Investor · Culver City, CA · Member since 2014 · 221 posts · 79 votes7yJust a thought. In down markets, people tend to be willing to live more people per apt. They will double up in bedrooms and live with their parents longer. So last downturn was in single family and led to more renters in some areas. That will not necessarily be the case in a future downturn. Being able to weather the downturn financially and mentally is important. Are you ok just scraping by for 5-7 years until it turns around? Like I said just some thoughts. What do you want to hold during that time?
- 7yLee BerkwitsPro MemberMemphis, TN · Member since 2017 · 16 posts · 6 votes
@Ken Scarbrough Responding to a few of your questions but first
>wouldn't lower housing prices and higher rents cause more people to want to purchase a home instead of renting?
>Therefore Lessening the pool of renters
Yes, theoretically.
Background: I owned a 4 bedroom home on 2.5 acres purchased in 1994, and saw things getting very frothy (chalk it up to experience, I had lived through a previous cycle.) I put it up for sale in 2006 and sold with a good capital gain. My plan was to stay out of the market for 3 years and then reenter. I had changed jobs and my wife and I relocated, so we were out of real estate entirely and we found a good rental (in which to live) in a single family home in an area that was very difficult to find good rentals (Asheville, NC). So the plan was to live in a rental for 3 years. The home which I we rented went up for sale 10 months after I moved in. It fit our household and lifestyle well, I was busting butt at a new job and did not want to spend the time to find another rental.
So we bought (not following my plan) in 2007 about 1 year before the crash and rode the market down. This was in a planned community with an HOA. 6 months after we purchased, the HOA took a successful vote to change the covenants to PREVENT rentals of any properties. In 2012 I had another job opportunity which required relocation. 5 homes were up for sale because they could not be rented. We did not want to hold a vacant home, so put it up for sale and lost all of our equity. (We ultimately moved back but the cost of holding the property unrented over 4 years would have been equivalent to the equity lost)
Issues that impeded home purchases during the crash:
Credit dried up: ie, the mortgage business transformed from handing out mortgages to anyone with 0% down to denying mortgages to people with 800 FICO scores. If you wanted to buy cash was king.
Inventory was down - Many homes were underwater - no one wants to sell a home if you are underwater and leave your equity on the table - so inventory was reduced. Those homes that were short sales or foreclosures - were under bank control - so everything moves extremely slowly.
By 2012 Blackstone purchased 300 single family homes in the Greenville, SC are - cleaning up a lot of the foreclosure backlog and further restricting inventory.
Now for the answers you have been waiting for, how does one prepare for a crash...
- Have a good stash of cash (not stocks, not bonds) to do deals if the banks are not lending and the market is crashing. Or, have a good working relationship with a hard money lender... as banks will be useless.
- Tilt yourself toward cash flowing properties - it is the flippers who were really caught with no chair when the music stopped
- Make certain your financial situation would not require you to sell a property at a loss (time is on your side - my shelf life is shorter than yours)
- Consider avoiding purchasing a condominium or home in a planned urban development due to overreaching homeowners associations who can AND WILL alter bylaws (after you purchase) preventing you from renting an owned property. [Remember if you sue the HOA you are suing your neighbors and yourself - BAD KARMA]
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes7y@Ken Scarbrough I definitely saw that in the last crash demand for rentals seems to go up . Many people lost their home to foreclosure /short sales etc but still need to a place to live so they rented . Construction also halted in many markets .. so less supply . I think as long as your in a neighborhood where people have decent jobs and wages things should be ok . Should keep a decent amount of cash reserves to plan for the unexpected .
- Rental Property Investor · Phoenix, AZ · Member since 2018 · 19 posts · 16 votes7y@Ken Scarbrough Crashes rent to happen every ten years or so. I believe a ‘crash’is when you have a 20 -30% drop. What happened in 2008 was well... much much worse. These happen much less frequently so IMO I don’t think we’ll see something like the 2008 apocalypse for a long time to come. That said, I’d echo what others have said. Make sure you’re not spread too thinly, have ample cash reserves and make sure your rents are in line with comps in the area. If we go through a down cycle you may need to drop rents to keep/attract quality tenants.
- Investor · Atlanta, GA · Member since 2018 · 59 posts · 78 votes7y
> wouldn't lower housing prices and higher rents cause more people to want to purchase a home instead of renting?
Yes, more people WANT to buy a home, but banks get tighter with lending and potential buyers don't want to pay a down payment if they aren't confident they'll be employed in three months.
So how do you prepare? Connect with people who will lend you money to purchase more properties when they're cheap. Savvy investors will understand that there is a lot of opportunity in a recession, and they'll looking for investment opportunities outside the stock market.
- Indianapolis, IN · Member since 2014 · 46 posts · 12 votes7y
THANK YOU EVERYONE for such thorough responses. I feel better about my current situation and more knowledgable on the dynamics of a market crash in general. Keep the good advice coming!!
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