Debate: Buy or Wait Given Looming Economic Recessionary Fears

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Debate: Buy or Wait Given Looming Economic Recessionary Fears

Riley C.
Chicago, IL · Member since 2017 · 13 posts · 14 votes

Hi BP,

I've set out a goal to purchase my first property before my current lease ends in April. I'm currently renting in Chicago and I'm looking buy a multifamily property in certain up and coming areas in inner city Chicago including  East Humboldt Park, Bronzeville, Pilsen, North Lawndale, etc.

What I'd like in feedback if you're reading this is, what's your opinion on buying in the near-term (e.g. Spring 2019 - 2020) with all the given expectations for a looming recession? Nobody can realistically accurately time recessions (although I personally believe we're certainly due for one very soon) and part of me feels as though an 'informed' investment is still an investment and a wise choice to move forward with. 

On the other hand, I also wonder if purchasing a property nearly before a recession is unwise given depreciation could potentially outweigh equity put in the property in addition to the opportunity cost of waiting longer until housing prices depress over time through a recession. I'm just looking for perspectives here... Any thoughts?

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y

Not that the market is going to collapse like it did a decade ago.....but honestly, most people dont have the cajones to buy during recessions.  Many think they will...but honestly during the last one, I was the only person I knew buying.

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  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    I own a small brokerage in Chicago, and I am a landlord.  So this is a good question.

    I think that certain neighborhoods that you have identified have upwards momentum due to local factors.  The areas you mentioned are gentrifying, to some extent.  North Lawndale is not one of them.

    During the last crash, the "improving" areas of Bronzeville and East Garfield Park took a dive in values.  North Lawndale was even worse.  

    Remember that your purchase serves two purposes.  First, it will be your home.  At least one unit.  So choose a place where you may want to live.  Any home has an investment aspect to it as well.  

    You can conventionally finance buildings 5 units and under.  

    7Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Not that the market is going to collapse like it did a decade ago.....but honestly, most people dont have the cajones to buy during recessions.  Many think they will...but honestly during the last one, I was the only person I knew buying.

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  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    @Russell Brazil

    The last recession was the best time of my career.  I knew it was a once in a lifetime opportunity to scoop up real estate assets.  That time frame accelerated my career.  Tough to be a broker during those years.  

    5Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Brian Ploszay:

    @Russell Brazil

    The last recession was the best time of my career.  I knew it was a once in a lifetime opportunity to scoop up real estate assets.  That time frame accelerated my career.  Tough to be a broker during those years.  

     Yup once in a lifetime opportunity that set me up for life. But I was the right age, with the right amount of disposable income, in a safe job, with money to invest.   Everyone thinks is going to happen again, but something like that is much more of an every 75 year event.

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  • Riley C.
    OP
    Chicago, IL · Member since 2017 · 13 posts · 14 votes
    7y

    Hi @Brian Ploszay,

    Thanks for the insight- It's interesting you commented with regards to North Lawndale. It actually isn't one of the neighborhoods I've had top of mind for up and coming neighborhoods but I've observed that it's not a 'bad' neighborhood for Chicago. I only moved here about a year ago, but do you think the general neighborhoods (and local economics, renter quality, etc.) has improved any if at all since 2008? 

    My goal is to scale up to apartment complexes with more experience but I'm certainly looking for 3+ units for my first property. The other consideration I had in parallel to a recession is the tax deductions and advantages of having 'good debt' in real estate. It seems like there are some certain potential cons but also some absolute pros or benefits.

    @Russell Brazil Thanks for the feedback. What opportunity do you see that makes it an apparent and obvious choice to continue to buy through a recession vs your peers concerns?

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    7y

    A good deal is a good deal no matter what else is going on. If your numbers work, conservatively, then they will work even better when things are better. 

    Your main concerns buying "before a recession" (as if anyone can actually predict the landing) is whether you have enough recession-proof income to ride out bumps and whether you can maintain renters at a reasonable tenancy and payment level if a flood of housing hits the market. If you can jump those two hurdles, all a recession might mean is that you don't make as much money.  The caveat in all of this is that you have to be buying the property at a level that makes sense now and in a down market. People who got killed in the last fallout were generally leveraged to the hilt and assumed growth would always continue in a linear and upward pattern. 

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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    @Riley C. I think you should buy no matter what. Markets hot, buy. Markets bad, buy. We do this with stocks and dollar cost average. Do the same with real estate. Because no one, and I mean no one can predict where housing prices will go. Those guys who say theyve studied the housing cycle and can predict it....nope. when you have a million people saying X and Y, somone is bound to be right by sheer luck regardless if their reasoning seems sound. The smartest guys in the world are hedge fund managers and something like 85% of them cant beat the market, and of the ones that do, then end up on the other end in other years. Theres only one Peter Lynch. Theres only one Warren Buffet. Pretty much no one else is beating the market no matter how smart or how well reasoned they seem to be.
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  • Riley C.
    OP
    Chicago, IL · Member since 2017 · 13 posts · 14 votes
    7y

    @Brian Ploszay @Russell Brazil Just caught each of your replies. While I was not of age back then to purchase any property, I keenly remember that recession and its impact across the country to say the least. Also - the mortgage crisis was certainly a unique buying opportunity and I don't see another 2008 recession happening in this economy or anytime soon. 

    I guess what it comes down to is your risk tolerance and whether you want to swing your cajones (or not) through the fire. I've been anxious to reach the goal of acquiring my first property investment (preferably before signing another lease) but I feel a 'sit and wait' for better buying opportunities or for just not buying an asset in quick sand might be a wise and patient decision... But not necessarily the decision I like.

    0Reply
  • Riley C.
    OP
    Chicago, IL · Member since 2017 · 13 posts · 14 votes
    7y

    @Russell Brazil I'd say that's a sound assessment especially with regards to basing decisions off of a relatively unknown (or unquantifiable) future state economy. I also like to follow posts and analysts on seekingalpha  and to your point, it's crazy how much analyses goes into predicting market futures just for a marginal amount of predictions to be accurate... And it often goes both ways for any analyst at some point in the future, correct or not. Thanks a lot for that input.

    0Reply
  • Nick Fegley
    Rental Property Investor · Lewes, DE · Member since 2016 · 27 posts · 5 votes
    7y

    I agree with JD Martin, run the numbers in the Bigger Pockets calculator. If they work, go for it. I recommend being conservative with you estimates though, especially with the potential for a slip in housing prices.

    3Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    @Riley C.   Smaller apartment buildings in prime areas of Chicago are not really priced as investments.  Many of them will not have a positive cash flow.  With respect to other commentators, I have some market fear right now.  Our local real estate market did not have a good fall (autumn) market.  Local realtors are complaining.  Prices for apartments are high, while interest rates are creeping up.

    Anyway, if the market softens a bit, which I expect, it will be a temporary buyer's market.  Prices won't necessarily fall, but you'll have more opportunities and negotiating strength.  

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    I like what Russell said . Everyone I know that really hit it off in real estate and expanded out did so during the real estate crash of 08’ . Fortunes were made and portfolios were quadrupled  in just a few short years . The time to make money is when there’s blood in the streets . We all know it ,we all repeat it ,but as the economy slows down people get scared ..they retract and cling to their money . It’s part of the human psyche to conserve when times are tough . The ones that “ make it” are those who have the ba//$ to invest in those hard times 

    5Reply
  • George M.
    Rental Property Investor · Albany, NY · Member since 2018 · 55 posts · 65 votes
    7y

    As far as when’s a good time to buy? Who knows? If it’s a deal for you that conservatively cash flows, get it done. If you are speculating or stretching numbers to “make it work” on paper, It’s probably not going to work.

    Your best properties are going to be the ones that you know it before you even run the numbers.

    Dennis and Russell’s comments resonate with me. I was not in the RE game during the recession but just out of luck I was starting my professional career. I had formed a pretty good relationship with my landlord at the time since I wasn’t a dirt bag and proactively informed him of little stuff and took care of many things myself. Somehow or another we got talking about investments and his advice was “if you can afford to invest $100 a month, find a way to make it $150, this is an opportunity of your lifetime.”

    While all of my friends were YOLO’ing, I was plowing every disposable dime into American stocks. Because really if the economy had collapsed, That money wouldn’t have been worth anything anyways.

    Now if I only had a dollar for every time one of my friends said “must be nice to have _____”

    5 years of sacrifice set us up for life

    4Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    7y
    Originally posted by @Riley C.:

    Hi BP,

    I've set out a goal to purchase my first property before my current lease ends in April. I'm currently renting in Chicago and I'm looking buy a multifamily property in certain up and coming areas in inner city Chicago including  East Humboldt Park, Bronzeville, Pilsen, North Lawndale, etc.

    What I'd like in feedback if you're reading this is, what's your opinion on buying in the near-term (e.g. Spring 2019 - 2020) with all the given expectations for a looming recession? Nobody can realistically accurately time recessions (although I personally believe we're certainly due for one very soon) and part of me feels as though an 'informed' investment is still an investment and a wise choice to move forward with. 

    On the other hand, I also wonder if purchasing a property nearly before a recession is unwise given depreciation could potentially outweigh equity put in the property in addition to the opportunity cost of waiting longer until housing prices depress over time through a recession. I'm just looking for perspectives here... Any thoughts?

     If you look for it you will always find a reason not to get started. There where people who weren't buying in 2009, 2010 & 2011 because they thought the bottom wasn't here yet. Boy do they regret sitting on the sidelines now. They aren't making any more land. Never a bad idea to buy.

    3Reply
  • Doug Pintarch
    Rental Property Investor · Harrisburg, PA · Member since 2018 · 369 posts · 406 votes
    7y
    Originally posted by @Russell Brazil:
    Originally posted by @Brian Ploszay:

    @Russell Brazil

    The last recession was the best time of my career.  I knew it was a once in a lifetime opportunity to scoop up real estate assets.  That time frame accelerated my career.  Tough to be a broker during those years.  

     Yup once in a lifetime opportunity that set me up for life. But I was the right age, with the right amount of disposable income, in a safe job, with money to invest.   Everyone thinks is going to happen again, but something like that is much more of an every 75 year event.

    Russell when we bought our STVR in Nov 2017 we were sitting in our attorneys office in Rehoboth Beach DE and he was telling us about the business during the recession...he had wealthy people he knew lined up in his office with checkbooks waiting for him, and he himself bought 4 more properties during that time.  

    We were talking about this over the holidays, we planned on our next unit this fall, and we still do.  Buy-and-hold with a nice down payment and manage it properly is our goal, again!

    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    People buy and sell homes during any economic climate.  Home prices in decent neighborhoods do not depreciate. If you think Amazon stocks were too high at $300, waited until it rose to $900 and thought it was ridiculously too high, you are wrong again at $2000.  If you think GE stocks were low at $20 and found out your timing is off, you will be underwater but will regroup. Research, research and work out your numbers. If you focus on low end neighborhood during the recession you need to know how to make your MFH mortgage payments w/o tenants rent.

    4Reply
  • Forrest Williams
    Real Estate Agent · Chicagoland · Member since 2018 · 314 posts · 199 votes
    7y

    If you're waiting until a recession is over, you're going to be waiting a long time. What if the promised recession doesn't come for another 5 years? That's a long time to be sitting on the sidelines. I encourage you to look analytically about this too. You say, "Nobody can realistically accurately time recessions (although I personally believe we're certainly due for one very soon)." What makes you an expert? Going with your gut isn't a great move when you can use bigger pockets calculators and other tools. 

    0Reply
  • Dave G.
    Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes
    7y

    @Riley C.

    It depends on your time horizon too. If you're buy/hold investor early in life (20s or 30s perhaps) you can easily weather a downturn if you're not over-leveraged, have reserves and do not need to sell prior to market recovery. @Brandon Turner makes reference to this frequently that real estate is very forgiving in the long term.

    If you're later in life, you may choose to sit on the sidelines and wait even if that is a few years. You might not not want to risk having an illiquid investment in the red on your books.

    But either way, as @Russell Brazil and a few others have pointed out, crowd mentality is fear when there is blood in the streets and normal people cannot pull the trigger in a market flooded with vacant repos. I remember looking at properties in 2010 and there were lockboxes and window postings everywhere. Doom and gloom in the publications and on the news everyday for a long time. Being a buyer was a lonely situation. I only bought 1 property that year and I screwed up not buying 10.

    Recommended listening: BP Podcast 311 w/J Scott & MadFientist Podcast w/Michael Kitces

    Kitces mostly talks the 4% rule (which is pretty good info) but briefly touches on market cycles and historical frequency of downturns/recessions. 

    Lastly, my 2 cents on buying property in a state like IL (and especially Chicago) is not wise long term. I grew up in Chicago and go back frequently for business and to visit family there. Morally & financially bankrupt political leadership, increasing taxes and continued net population outflows. If you plan on owning property for several years or more, I believe an investor needs to consider these factors and and how landlord/business-friendly the state and local governments are. Personally, I would look out of state, perhaps next door in Indianapolis. 

    Best of luck to you,
    Dave

    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    @Russell Brazil  @Brian Ploszay  I think this is highly regional one thing to remember is when things get bad and I agree don't think it was be a repeat of 08 to 2011.. but credit in many areas froze like the Antarctic.. So investor loans were dog tough to get and only for the most well qualified.. and rates now are still historic lows they dropped actually in December at least owner occ did.. 

    so depending on the area and if you have uber capacity to transact you can take advantage.

    I look at a lot of the folks that post here and many are in areas were houses are priced like autos pretty easy to buy 4 houses when they are only 20k each.. :)  

    so keep in mind things get tough financing could hinder your ability to partake  today financing is still very strong. 

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    @Jay Hinrichs Yup....thats why having your financial house in order is imperative. If you have crap credit and no money, you simply shouldn't be buying real estate. I love BP, but there is too much of this buy with no money, or someone elses money stuff. Sure, I can go in and buy with no money because I can use a cross colateralization loan against other assets, or just the fact that so many people come to me and want to do deals with me because Im successful (btw everyone, if I havnt known you for 5+ years and did multiple other types of business with you, Im not partnering with you). People need to start with step 1, get good credit. Step 2, eliminate bad debt, step 3 learn to save, step 4 learn to invest, step 5 learn to invest in real estate. The people who skip steps 1 through 4 will either fail, or take on so much risk they go bankrupt in a downturn.
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  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    We may slow a bit, but there is no catastrophic event on the horizon.  No one ever knows what is going to happen and if they tell you they know, they are selling you something.  it is hard enough to look around and know what is happening right now.  If you look back to before the election, all the news outlets were predicting a recession.  It is still coming?

    Granted, if we get into a full-scale trade war with China, go to war with Mexico, leave the government closed for the next 6 months, then all bets are off.    

     Hoping for a recession so you can save a few bucks on a property is short-sighted.  There is an assumption that all will remain the same except the price of the property you want to buy will just drop.  This is not a zero-sum game.  For you to get a deal at 75% off someone needs to lose and lose badly.  The first thing to go in a crisis is liquidity.  If you have Scrudge Mc Duck piles of cash and do not need to depend on your business or job to pay your bills or credit to make deals...  If you need your tenants to pay rent to cover the mortgage, then you could be the one selling off the property at 75% off.

    My point is, follow solid practices and buy good deals.  Use leverage as a tool, not a crutch.  A reputation and experience are going to be important when and if the next crisis comes.  Real estate does not happen in a vacuum.  

    I am a net buyer (i buy more than I sell) and will be for the foreseeable future.  

    7Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y
    “It is your decisions, and not your conditions, that determine your destiny.”

    ― Tony Robbins

    3Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    I bought and made money during HOT real estate markets and bought and made money even during 2008-2009.

    It does not matter. It's just easier to buy when the real estate market is down and easier to sell when the real estate market is hot.

    Buy conservatively so you can hold the property for as long as you can (buy a property so that its cashflow is healthy). Then regardless of the market, you will make money.

    2Reply
  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    7y

    Absolutely still a buy market. As apartments go, we're in a stage where good value add opportunities are most difficult to make happen than they were 4-6 years ago.

    1. Buy for cash flow
    2. Use long term debt
    3. Only buy in markets with growing employment & population and a diverse economy
    4. Make sure you can handle increased vacancy & a possible drop in rents

     @Russell Brazil makes a great point about people overestimating their future willingness to buy in the midst of a recession.

    0Reply
  • Account Closed
    Rental Property Investor · Jacksonville, Florida Area · Member since 2016 · 106 posts · 48 votes
    7y
    @Riley C. I say look for a good deal no matter what. There will always be distressed properties with value to add, no matter what kind of economy!
    4Reply
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