If the economy crashes 11/2020, what should new investors do now?

26 Replies

For a new investor interested in cash-flow and appreciation only after 10-20 years (dont care so much about fluctuation before). For an investor who plans to hold everything, what should they do to protect against potential crash?

I was thinking getting a bunch of 5'% down $600k+ properties, would be bad. Would not want to be stuck holding pricey liabilities during a time when:

I may loose my job or take 50% paycut (I've see this before)
Renters might start moving to cheaper places causing cash-flow to drop
Great deals might pop up as a result but cant touch with all money tied up in pricey houses (no flips)

I think the strategy to do is, get the cheapest single family in decent area and put near 20% down
Then start saving for 5%-10% multi down during crash and pickup 3-4 units and hold for 10 years as market recovers and I can raise the rent up. Maybe make one of these a cheap flip. Try to turn a $280k multi into a $400k multi by the time the market recovers; profit on natural appreciation plus boost from renovations.

Finally would be nice to invest some cash into creating some kind of alternate income. App business or educational content or something to help deal with risks of a market down turn.

@Orlando Goodon   There is no way to know if and when a crash will happen.  You should always make sure you are not overextended and have resources in the bank.  If you are planning on holding onto properties for a long time, then it won't matter as the price will go back up...eventually.  Maybe not if you bought it while prices were overinflated, but everything you do has some risk involved.

Others will tell you if the market goes down, buy when it is near the bottom.

@Orlando Goodon

I'd do that now...why wait for a recession that might not show up? Even if we are hit, where are you investing? Some RE markets will be completely effected while others will not be as effected. Your plan sounds good, however, why not skip the SFH and jump into MFH?

Originally posted by @Nick Rutkowski :

@Orlando Goodon

I'd do that now...why wait for a recession that might not show up? Even if we are hit, where are you investing? Some RE markets will be completely effected while others will not be as effected. Your plan sounds good, however, why not skip the SFH and jump into MFH?

The issue with MFH is it's more complicated and time consuming:

     Double the cost ($600k vs $300k), therefore more time to save deposit
In order to get affordable loan (FHA), I have to live there so VERY limited inventory of commutable places
     If I'm going to live there I need to find a place that works for me (Garage, close to work, large living room, safe)

Looking for single family is easier because:
     I already have $30k saved so could buy it now
     Much easier to find a house with what I need (garage, layout) as single due to increased inventory alone
     Very limited 3-4 families period. In NJ, it seems 70% single, 20% duplex (rent does not seem to cover mortgage usually) , 10% 3/4 fam

So trying to find a house in a small market that is also needs bigger deposit is a challenge.

@Orlando Goodon - house hack!

Don't know a thing about your market, but you can buy 2-4 units and they're treated as a SFR from a lending perspective so you can put as little as 3% down.

Live in one - rent out the other three.

If (when) a crash or correction happens, you'll be in a sweet spot as your largest expense is covered by rental income from the other 3 units.

Look for some margin, so if you have to drop rents to appeal to more tenants you're not coming out of pocket.

You can actually do this once a year, so in 5 years, if you bought a 4plex every year, you could own 20 units.

A lot of people have posted about house hacking, there's podcasts about it and @Craig Curelop wrote a book about it: https://www.biggerpockets.com/store/house-hacking-ultimate

I wish you well!

Originally posted by @Theresa Harris :

@Orlando Goodon  There is no way to know if and when a crash will happen.  You should always make sure you are not overextended and have resources in the bank.  If you are planning on holding onto properties for a long time, then it won't matter as the price will go back up...eventually.  Maybe not if you bought it while prices were overinflated, but everything you do has some risk involved.

Others will tell you if the market goes down, buy when it is near the bottom.

 So I just took a peak at the data and it seems you are correct. The economy seems more predictable than housing. People always need homes and no new land so I dont see major hits outside of 2007. That is amazing how stable the housing market has been. From 1963, the only big dip I can even see is 2007. It seems economic down turn does not really hurt that much other than I'd assume:

Hard to sell when people are struggling
Rental income might drop as renters downsize but might also increase as people default on homes
More evictions as renters lose jobs and have pay drops

So for holders like myself, economic down turn is not that big of risk assuming I:

maintain healthy reserves for maintenance

Get cash flow that covers 90%+ of mortgage (If I take financial hit; I can cut back aggressively with a very low out of pocket cost of living)

So I really need a 3 unit. So Maybe I do:

Single family first, then look for triplex or quad
Then after I get one of those, look for a duplex for me (That way I'm paying no mortgage or barely any; I want to avoid a $1700-$2300 monthy)

In the end I live in duplex and rent a single and a 3-4 family. Starting with single gives time to find the MF that I can live in to get the primary residence discounts

Originally posted by @Andrew Davis :

@Orlando Goodon - house hack!

Don't know a thing about your market, but you can buy 2-4 units and they're treated as a SFR from a lending perspective so you can put as little as 3% down.

Live in one - rent out the other three.

If (when) a crash or correction happens, you'll be in a sweet spot as your largest expense is covered by rental income from the other 3 units.

Look for some margin, so if you have to drop rents to appeal to more tenants you're not coming out of pocket.

You can actually do this once a year, so in 5 years, if you bought a 4plex every year, you could own 20 units.

A lot of people have posted about house hacking, there's podcasts about it and @Craig Curelop wrote a book about it: https://www.biggerpockets.com/store/house-hacking-ultimate

I wish you well!

Thanks for the info! I should be able to do up to 3 family FHA with most lenders. Some its limit of 2. Problem is it will take some time due to low inventory and my commute requirements since I have to live there.

If there is a slow down, and people lose there job,s or incomes decrease, people will move to lower end rentals.  Rents can increase or decrease in a slowdown.  This depends on your market.  For example, if people are getting kicked out of their homes and into rentals, and the rental supply is light, rents go up not down. 

In a down marketing, you could be faced with non-paying renters which you'll need to evict.  This means you'll need to cover the expenses and or damages etc.  If this could potentially be an issue, perhaps you should start out investing in a syndication.  

A syndication will allow you exposure to real estate investing, but avoids the burden of having to evict and cover expenses should a vacancy happen.   If reserve funds are not an issue, just make sure the deal cash flows well.  You'll want to be sure you can cover all expense with the rental income.  When running these calculations, simply account for rents decreasing 10%, 20% 30% etc. to simulate a down turn.  If the property still cash-flows, it may be worth the investment. 

As long as they are good deals now, keep buying.  Provide for a bit of a cushion on the cash flow, and you wouldn't be in a position where you need to sell anything if you combine it with reasonable cash reserves.

@Orlando Goodon The first way to protect yourself is buying correctly.  You want to make sure that you are buying in a way that establishes enough built in equity.  That way, in case of a crash, you are protected.

Secondly, make sure you have reserves!  Don't rely solely on your assets.  Have liquid reserves on hand at all times.

Thirdly, find partners with ALOT of cash.  In the event of a downturn, lenders will be a lot more stingy than they are now.  It will be much harder to get traditional financing.  Cash is king in a recession/downturn.  

Last and certainly not least, Don't invest based on speculation.  No "if this happens then this will be a great deal" or "I'm negative in monthly cashflow, but long term appreciation will offset it".  Rely on the solid information on hand.  No investing based on hearsay or rumors!

@Orlando Goodon

Okay, I see where you’re coming from. You didn’t mention you were in NJ. I’m from Cortland, NY (Upstate) where the average price for a single house is 130k, multifamilies go for 100k-150k. Far cheaper to do multis than singles.

So what’s your plan? Short term rentals or long term?

@Orlando Goodon

What if a slowdown doesn’t happen until 2021? What if their is a mini crash but there is so much cash on the sidelines waiting for it that the market picks right back up?

So many questions because you can’t time the market but if you’re planning on holding onto a property or a few long term, why not pull the trigger?

What will you gain waiting on the sideline?

Originally posted by @Stephen Wilson :

@Theresa Harris

The problem with trying to the bottom is, you don’t know your in the bottom until after things start rising.

True, but if you are happy with the numbers and they work for you, sometimes you just have to go for it.  Like buying a house, there could always be a better deal but better to get something good than sit on the sideline looking for the perfect deal (which probably doesn't exist). 

A dip or a slow down of the economy/market is something we must prepare for.

In my oppinion single family homes and SFRs are best to buy and hold short term. Flips are great and can yield high returns. If you buy SFRs in the down turn they can provide good cash flow until the market turns around at which point you can sell high. We recently liquidated almost all of our single family homes and did very well using this strategy. (Buy during the down turn, rent, and sell when the market bounces back.) To many people though don’t think of their exit strategy which can be the most lucrative piece to the puzzle!

I beleive now is a great time for investors should sell their single family homes and invest everything into multi family apartments. Unlike other real estate investments, apartments are typically tied to residential trends and demographics. As we've seen in the past, apartments can actually appreciate during a recession, making them an insulated investment. Apartment complex investments are strong now and will be more insulated if a national market correction happens in the coming months or years.

@Orlando Goodon ,

If the economy crash so be it, for now continue making good cash flow, by then, you don't care about economic crash. I tell you, last time 2008 crash, there are more wealth created that lost, economic crash happened a natural economic cycle. When economy is bad, there are greater opportunity in real estate than in good economy. Hope this help.

Originally posted by @Nick Rutkowski :

@Orlando Goodon

Okay, I see where you’re coming from. You didn’t mention you were in NJ. I’m from Cortland, NY (Upstate) where the average price for a single house is 130k, multifamilies go for 100k-150k. Far cheaper to do multis than singles.

So what’s your plan? Short term rentals or long term?

Long term but with a 3 fam I could do both? Air BnB and long term.

Originally posted by @Elliot Shoener :

If there is a slow down, and people lose there job,s or incomes decrease, people will move to lower end rentals.  Rents can increase or decrease in a slowdown.  This depends on your market.  For example, if people are getting kicked out of their homes and into rentals, and the rental supply is light, rents go up not down. 

In a down marketing, you could be faced with non-paying renters which you'll need to evict.  This means you'll need to cover the expenses and or damages etc.  If this could potentially be an issue, perhaps you should start out investing in a syndication.  

A syndication will allow you exposure to real estate investing, but avoids the burden of having to evict and cover expenses should a vacancy happen.   If reserve funds are not an issue, just make sure the deal cash flows well.  You'll want to be sure you can cover all expense with the rental income.  When running these calculations, simply account for rents decreasing 10%, 20% 30% etc. to simulate a down turn.  If the property still cash-flows, it may be worth the investment. 

Very good info! I like the thought process of cash flow cushioning to resist cashflow dips. Says to me I need to be more aggressive in my cashflow requirements. I need to stop looking at break even properties. Need to make 10%-20% more than expenses. That will mean playing around with increased deposit and  seek high mid point rents. For my market, I'm thinking I need to try to get just under $2000/month per unit. $1600-$1700 should be easy enough but higher rents will be a challenge. More expensive house and therefore up front costs. 

Originally posted by @Steven McCutcheon :

@Orlando Goodon

What if a slowdown doesn’t happen until 2021? What if their is a mini crash but there is so much cash on the sidelines waiting for it that the market picks right back up?

So many questions because you can’t time the market but if you’re planning on holding onto a property or a few long term, why not pull the trigger?

What will you gain waiting on the sideline?

 More cash reserves. The longer I wait the more power I gain. I can afford better houses and still have low mortgage and maximize cashflow and have additional cash on hand for emergencies. So in short, time lowers my risk profile and increases my cashflow(less mortgage bigger cashflow). 

Originally posted by @Andrew Davis :

@Orlando Goodon - house hack!

Don't know a thing about your market, but you can buy 2-4 units and they're treated as a SFR from a lending perspective so you can put as little as 3% down.

Live in one - rent out the other three.

If (when) a crash or correction happens, you'll be in a sweet spot as your largest expense is covered by rental income from the other 3 units.

Look for some margin, so if you have to drop rents to appeal to more tenants you're not coming out of pocket.

You can actually do this once a year, so in 5 years, if you bought a 4plex every year, you could own 20 units.

A lot of people have posted about house hacking, there's podcasts about it and @Craig Curelop wrote a book about it: https://www.biggerpockets.com/store/house-hacking-ultimate

I wish you well!

 I wonder about buying house every year. How that works from a perspective of lenders and your credit. All those inquiries every year and increasing debt. First you owe $400,000, then $700,000 the next year, the a million... I just got credit from 580 - 660 because I dont use credit much before this year and had a charge off a while back.

Sounds like a good plan @Orlando Goodon . Everything works for the best long-term. It is riskier doing nothing than moving forward. People who end up with nothing never do anything. You can recover from market crashes. We don't control everything.

Originally posted by @Theresa Harris :
Originally posted by @Stephen Wilson:

@Theresa Harris

The problem with trying to the bottom is, you don’t know your in the bottom until after things start rising.

True, but if you are happy with the numbers and they work for you, sometimes you just have to go for it.  Like buying a house, there could always be a better deal but better to get something good than sit on the sideline looking for the perfect deal (which probably doesn't exist). 

 Sorry, I guess I should clarify a little better Teresa. I was agreeing with what you said about NOT waiting until it hits the bottom. Because you never know when you’ve hit bottom. Until it begins to rise again. Don’t get me wrong here either. I’m not discouraging from buying at what indicators might indicate to be close to the bottom. I would have funds put away for that very reason. So you can ramp up on the buying. During this time however I would buy correctly, if the numbers make sense and not off of speculation. Read @BillPlymouth’s response, explained perfectly. You all are saying the same basic thing, and that’s exactly the same way I feel. Sorry for the confusion.✌🏼

Originally posted by @Patrick Nickerson :

A dip or a slow down of the economy/market is something we must prepare for.

In my oppinion single family homes and SFRs are best to buy and hold short term. Flips are great and can yield high returns. If you buy SFRs in the down turn they can provide good cash flow until the market turns around at which point you can sell high. We recently liquidated almost all of our single family homes and did very well using this strategy. (Buy during the down turn, rent, and sell when the market bounces back.) To many people though don’t think of their exit strategy which can be the most lucrative piece to the puzzle!

I beleive now is a great time for investors should sell their single family homes and invest everything into multi family apartments. Unlike other real estate investments, apartments are typically tied to residential trends and demographics. As we've seen in the past, apartments can actually appreciate during a recession, making them an insulated investment. Apartment complex investments are strong now and will be more insulated if a national market correction happens in the coming months or years.

Agreed!  As apartment investors though we have to be mindful not to get excited and to make sure we're not overpaying for properties we buy. 

@Taylor L. that’s right! Triad in NC is a tough market. Especially Raleigh area. I know some sellers who have done very well this year. I’ve also had a few trades really surprise me in what they brought! Gotta triple check the underwriting and due diligence now more than ever!

@Orlando Goodon - I think you're confusing good debt with bad debt. This distinction was really illuminated for me when I read Rich Dad Poor Dad.

If your credit score has been at 580 (no shame in that btw - good for you for working to get it up!) then you've most likely taken on bad debt - debt on depreciating items (cars, credit cards, consumer purchases, etc...) Banks look at that debt very differently than debt (mortgages) on real, appreciating assets: houses, apartments, commercial buildings, etc...

And, if you're renting them out, they count a chunk of the rental income towards your overall income when calculating your credit worthiness. 

To your earlier point, you don't want to be holding a $600k mortgage on a single family home when there's a correction. But a $200,000 mortgage on a duplex that throws off $500 a month? If you've put 5% down that's a $10k cash investment on your end, $500 x 12 = $6,000 a year in cash flow - so that's 60% Cash on cash return. 

Even if that investment is under water (temporarily worth less than you paid for it) as long as you hold it and keep cash flowing, you're golden.