Macro economic risks in real estate investing

5 Replies

Hi fellow BP members,

I’d like to get everyone’s opinions on the current macro economic risks that may affect real estate investing over the next 2 years.  Specifically, I’m referring to the fact the some larger, more pricey areas on the west coast, seem to be experiencing a pullback in the housing prices.  In my local investing area here in Florida, many local real estate agents are seeing a slowdown in housing sales both in listings and active buyers.  The yield curve continues to be inverted implying a recession in the next 6-18 months.

My question is more for long term rental investors.  Are you continuing to purchase additional rentals if the numbers make sense despite the risk of the asset losing considerable value if a recession comes to fruition or if our current real estate cycle retracts.   I’ve heard arguments on each side with prominent BP contributors jumping passionately on one side of the argument or other.   

Are you buying more rentals in this market if the numbers make sense.  Are you waiting for a big downturn to buy more at a significant discount?  Are you selling your rentals now to have significant capital to deploy later. 

Thoughts?

Originally posted by @Ryan Hamaker :

Hi fellow BP members,

I’d like to get everyone’s opinions on the current macro economic risks that may affect real estate investing over the next 2 years.  Specifically, I’m referring to the fact the some larger, more pricey areas on the west coast, seem to be experiencing a pullback in the housing prices.  In my local investing area here in Florida, many local real estate agents are seeing a slowdown in housing sales both in listings and active buyers.  The yield curve continues to be inverted implying a recession in the next 6-18 months.

My question is more for long term rental investors.  Are you continuing to purchase additional rentals if the numbers make sense despite the risk of the asset losing considerable value if a recession comes to fruition or if our current real estate cycle retracts.   I’ve heard arguments on each side with prominent BP contributors jumping passionately on one side of the argument or other.   

Are you buying more rentals in this market if the numbers make sense.  Are you waiting for a big downturn to buy more at a significant discount?  Are you selling your rentals now to have significant capital to deploy later. 

Thoughts?

Ryan,

I am buying MORE apartment buildings NOW.

I've been investing in real estate since 1999 and actually THRIVED when the real estate crashed in 2008 and THRIVED when the real estate market went up from 2011 to now. I love both market cycles and I can make money in BOTH.

I buy below market and I am able to force the appreciation of my apartment buildings in the short term and profit from the cashflow immediately. So to me, long term appreciation is just a bonus and even if my properties lose all their equity when the market crashes (and I wont lose all the equity - it will just be reduced), the cashflow on them will continue to sustain me as they are now.

And when the market crashes, I have enough cash to buy EVEN MORE apartment buildings!

BOTTOMLINE: instead of worrying about the economy and the next market cycle, learn how to invest in real estate regardless of the market. 

I am studying strategic economics in my MBA program currently. I am by no means an extremely savvy economist. However, I have seen that economics is a much broader concept that we believe it to be. The macroeconomics state is impacted by international markets across all industries. To look at the real estate market as a whole would still be just a minor fraction of the global economic picture. 

My point is I think that it is incredibly hard to predict what the housing market will do and how long it will last. I agree with @Michael Ealy , that if you are in the buy and hold game you will outlive many market cycles. If you are buying one and two projects a year I don't think an overhaul of underwriting is necessary. If you are turning out large projects with hard money, then margins might become more relevant. 

I don't know if I answered your question or not, but I hope I provided some insight. 

@Ryan Hamaker , I'm curious where you are getting your data on the inversion curve. According to FRED, the 10 yr minus the 2 yr treasury has maintained a positive balance in this cycle (even though it is very low around 0.15~0.2).

https://fred.stlouisfed.org/series/T10Y2Y#0

We're certainly in unpredictable times since this cycle has just passed the previous longest one (in the '90s) and we may be seeing a new fundamental regarding recession predictability.

My research agrees with @Michael Ealy and @Michael Glaspie that real estate (especially multifamily) is historically resilient during a recession and is not an important factor for the true long term investor.