Hello Everyone, This is my first post on BP, as I just made my account a few moments ago, so please excuse me if my forum post is not formatted correctly. I am looking to buy my first rental property around July 2020, however I am a bit reluctant because there is one scenario that kind of scares me. Let's say I buy a rental house for $275,000 in July 2020. 3 years go by and as I am paying principal and gain equity on the house, I have accumulated, say, $30,000 equity on the house (sorry if this is not a realistic number, just for sake of example) But let's say that the housing market crashes or takes a dip from 2020-2023 and the value of this rental home dropped in this time period from $275,000 to $195,000. What exactly would happen to my equity in the property because of the drop in market value of the house? Also, would I still be paying a mortgage worth $275,000 if I did a 30-year-fixed mortgage back in 2020? Is this a realistic scenario, and would it even effect me negatively if at the end of the day if I am simply just trying to cashflow each month from a rental? I know it is seen as trivial to try and time the housing market, but a scenario like this kind of scares me because I am young and inexperienced. But my question is, is this even realistic, and if it is, would it even effect me if I am just trying to cashflow off rent each month? Sorry in advance for my ignorance on the subject and thanks in advance for guidance and consideration.

You wouldn't just have no equity but negative equity, however unless rents take a dive too the property would still cash flow, even if not as much as other properties that would be available. This happened in the 08 recession to quite a few people but that was an extreme event, could it happen? Yes. Is it super likely probably not, but nobody has a crystal ball on markets.

@Zeeshan Mallick although you'll be the one to pay the mortgage technically, it will be with money that your tenants earned and paid in rent. The only time decreased equity hits you in the wallet is if you want or need to sell. Your mortgage is amortized from the moment you buy it. Other than property taxes and insurance that can change, the Principle and Interest payment is set for 30 years regardless of what the market does. You can, on day 1, see how much principle you'll have paid off after 10 years of paying the set payment. How much equity you have is in relation to the current day appraised value....which only matters if you plan to refi or sell. Your tenants don't care and your mortgage company doesn't care. They keep paying rent and you keep paying the mortgage on the terms you agreed to at closing. You don't want to overpay, of course, but if you live in a relatively strong and stable market (population growth over time, good employment numbers), rents likely will not drastically decrease even if home values do for a brief correction period. Many who lost a fortune in the previous crash were buying for appreciation only, leveraging homes to 100% loan to value, and were either not cash flowing at all or even bleeding money each month (negative cash flow). They hoped appreciation would make up for it and it didn't, so their house of cards fell apart. Many others who had bought smart, kept some equity in each property, and stayed steady for years before the crash simply held on through it. Sure, their equity dropped from 08-13 or so, but their tenants continued paying their expenses, paying principle down, and earning some cash flow. Maybe they didn't increase rents as much, maybe they had an uptick in vacancy, but they didn't sell and so they never 'realized' that loss since they didn't have to sell during a low point. Now values have come back up and their principle balance on mortgages is lower than it was 10 years ago. Nobody can guess what the market is going to do for sure in 3 years or 5 years. But I can almost certainly guarantee that anything you buy next summer will be worth significantly more than you pay in the year 2050 when you pay off the mortgage. Buy and hold investing is a long term strategy not effected much at all by short term market shifts that historically always come back around. Outside of the mortgage payment, you want to make sure to take into account Vacancy, Repairs (Smaller items that come up over time), CapEx (Capital Expenditures...big items like roofs, HVAC systems, etc), property management fees. Even if you self manage, run your numbers as if you hire a property manager so that if you decide to some day you've already planned on it. There's lots of great information on the forums about each of these reserves and how to arrive at numbers based on risk tolerance and the property itself, but my point is that you want to be sure to be setting aside some of the rent every month for these as well as to pay the mortgage. If, after accounting for all of these expenses, you cash flow a couple hundred a month....then you are earning money while your tenants quite literally pay down the mortgage. Mortgage principle pay down and appreciation are just the icing on the cake. There are some more complex strategies and calculations involved in determining when would be a good time to refinance out additional equity for more properties, sell and exchange for other properties eventually, etc. However, at it's core, you're buying something with a small percentage down that your tenants will ultimately pay off for you over the course of 30 years. A great book to read to grasp the long term benefits of buy and hold investing is Building Wealth One House at a Time by John W Schaub. There are much more aggressive and lucrative methods to build wealth faster and acquire more properties more quickly, but at it's core that book is eye opening to the power of 'slow and steady wins the race'.

Property values dropping are only a problem if you sell. Dont sell. You know who got burnt in the housing collapse? People who sold. You know who got rich in the housing collapse? People who didn't sell.

@Zeeshan Mallick I won’t give advice, but I will give you a real life example that goes with your question. I bought a condo for $105k in 2007. This was my primary residence at that time. Then the market crashed. I actually bought a second condo, same property, same layout, everything, for $49k as a rental. If you’re reading between the lines that means that the unit I bought at $105k was also now worth $49k. I had negative equity in the original property. However, when I rented out those properties the leases were $900 / month. My mortgage, including taxes and insurance was around $575. Plus HOA of $125 my costs before repairs were $700 vs. rental income of $900. Basically, even though I now had negative equity, I was still at positive cash flow. Not that positive, but positive. It was still a fine investment. The one I purchased for $49k has always been a MUCH better investment, but as others have pointed out we don’t have crystal balls. If I knew the market would tank again I would suggest waiting. But if something cash flows now it is likely to cash flow going forward. And if it matters, those condos now go for $110k. I’m thinking about selling the one that I bought for $49k, but I’m not sure I can find a better investment.

@Zeeshan Mallick equity is the difference between what you owe (mortgage) and the value of the property at any given time. However the value of the property is only truly determined when you get an appraisal, such as when you buy the property or sell it. So, if you are buying a property to hold long-term because you want the monthly income then the house price dropping shouldn't be a huge concern (long-term housing prices have pretty much always gone up, historically). However, if you're wanting to buy a property and then sell it for a profit just a short time later, then this is a large concern. The problem is, no one can predict the housing market (people have been calling a recession for years) so trying to bank on appreciation as an investment strategy is fairly risky unless you're in certain areas (California for instance).

I have been investing for 15 years and have never purchased a property where there was a probability of large declines in value...even prior to the last recession. And forcing appreciation with property improvements can provide additional risk mitigation.

Even California RE values have peaks and valleys. If you are betting on short-term market appreciation in So Cal, I would classify that as fairly risky. However, if you perform a value add then you can somewhat insulated against most depreciation cycles. Buy n hold should be looked at as a long term strategy. Other strategies are shorter in term. Timing the market is tough to do and not absolutely necessary if you are planning a long term hold. In the long term, So Cal RE has appreciated more than inflation for at least 60 years. If you do buy n hold, plan on holding the RE a decade or longer. It would be a very rare depreciation cycle that lasts a decade (very unlikely). Good luck

As others mentioned, your mortgage does not change on a 30 year fix if your property value goes up or down, all that changes is your “equity”. Additionally, unless rental rates drop too, your cash flow doesn’t go down either so as long as you had positive cash flow from the start, you will continue that. Eventually in 30 years you own free and clear. Don’t wait but buy smart and don’t over pay for current market values. Find deals as only deals will likely cash flow in up markets.

What happens if rental property value goes down?

Patrick J.

Rental Property Investor · Tucson, AZ · Member since 2019 · 173 posts · 87 votes

6y

@Zeeshan Mallick

Something that might cash flow on paper might not cash flow in real life. You need to be patient and know how to analyze multiple properties on a daily basis 365 days a year.

You can find a cash flowing property making $1,000/year but cost you $50,000 in cash for a down payment + other costs to acquire the property. That means you're getting a 2% cash on cash return and it's going to take you 50 years to recoupe the cash you invested. This is not a deal you want unless you're banking on the property's appreciation going up by 20x. I was always told to invest based on cash flow and not appreciation and 10+% cash on cash is what you should be looking for. Value added properties. Most multifamily properties are overpriced in Phoenix so it's going to be hard for you to find solid deals.

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Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

6y

@Zeeshan Mallick

FEAR is the killer of dreams, especially future fear.

Think about this: What if none of this happens??!!!

You cash flow and live happily ever...

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Michael Cox

Property Manager · St George, UT · Member since 2019 · 23 posts · 8 votes

6y

Good thoughts. Something to think about if there is a large scale housing correction and the price of your investment drops... so are your neighbors. They get scared and walk away from their house, shortsell, etc. they still need a place to live. Bad housing markets tend to create more renters... which *can* drive rental prices up.

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Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

6y

@Zeeshan Mallick a reduction in property value will reduce your net worth. Just like in late 2008 when the stock market crashed, most people experienced double digit percentage loss in net worth. But keep in mind net worth is simply the value of everything you own. It doesn't become an actual loss until you sell.

The real concern here is rents and cash flow. If the property maintains the same or greater cash flow, then you can continue to make payments and it will not affect you.

So what can go wrong? Well if the prices in a given market drop significantly, it could put downward pressure on rent prices. If rent prices drop below your debt service (mortgage payment), then you could end up without enough income to pay the mortgage.

If you are unable to pay your mortgage, the house could go into foreclosure. If the bank takes back the property, your "paper net worth loss" becomes a real loss.

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Zachary Collins

Denver, CO · Member since 2017 · 33 posts · 15 votes

6y

@Zeeshan Mallick

The market value may go down which results in negative equity, like others have mentioned

However the real value of a deal is that it’s still a house/unit. Real estate over 10 year spans almost always go up in value. A place to live is always valuable to people

You don’t actually lose money until you sell it.

For the cash flow, Just make sure you get a deal that is cash flowing substantially, in case a crash does happen and you need to lower the rents. If you find a deal with legroom you’ won’t be cash flowing as MUCH but you’ll still be cash flowing and paying the mortgage, weathering for better years.

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Bob Prisco

Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes

6y

@Zeeshan Mallick July 2020 ? You are overthinking,. Who care if the price goes up or down 10 20 % you are buying for cash flow. . Rent still comes in. I suggest you team up with an experienced investor to LEARN

Good Luck

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Kiera Underwood

Real Estate Agent · Oklahoma City, OK · Member since 2019 · 956 posts · 600 votes

6y

@Nick Rutkowski your first deal doesn't have to blow! If you work with providers that have done it 400 times you get to piggyback on their experience!

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Kiera Underwood

Real Estate Agent · Oklahoma City, OK · Member since 2019 · 956 posts · 600 votes

6y

@Zeeshan Mallick it depends on the market and the purchase price.

My strategy: buy in a market that cash flows through the downturns. Hold long term, but more specifically until you're at the top of a market cycle.

In Oklahoma City we don't see big hits from market shakes, but there was still some drop in property value in the last recession (6.5%). That said our rent rates were stable in the B and C class properties! So anything under $150k was safe. You might have seen some minor value dip, but your rent rates stayed solid!

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Frank Hernandez

Miami, FL · Member since 2016 · 8 posts · 1 vote

6y

@Russell Holmes

1st or second edition of Building wealth... ?

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Nick Rutkowski

Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes

6y

@Kiera Underwood

Yeah...I guess we all choose different routes. I chose the hard road apparently.

0 Reply

Tim Soto

Realtor · Ventura County, CA · Member since 2012 · 126 posts · 61 votes

6y

I would just make sure not to put myself in a position of having to sell. Get fixed terms for your mortgage vs adjustable. If the mortgage terms are fixed, principle balance and payments will continue as they have been. If the property is cash flowing, then it shouldn't matter when the market takes a dip because then my payments aren't fluctuating and I don't have to sell. I can ride out the storm. Hope this helps. Good luck!

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Hai Loc

Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes

6y

@Zeeshan Mallick

That's part of the game when it happens you just need to ride the cycle. As long as you cash flow you will be fine

0 Reply

Tim S.

Investor · California, CA · Member since 2016 · 367 posts · 375 votes

6y

@Zeeshan Mallick I'm concerned about your July 2020 target. Buy when you are ready to buy, and you find the right deal, not when the calendar reaches a specific date. Based on the basic nature of your question I'd say you are not ready to buy right now. However the fact that you are asking it bodes well for your readiness next year.

As many have said, the risk is that you may be forced to sell at a bad time. Say the market drop 30%, you lose your job, and the rental that was making a couple hundred each month, is now costing you hundreds a month. Can you weather that?

Around here that's what happened 2006-08, people had FOMO, felt they had to buy at or near the peak in 2006. They feared if they didn't get into the market it would keep going up and they would never be able to buy. So they stretched their budgets to the limits and bought a house they could barely afford. When the downturn came, people got laid off, houses went into foreclosure, rents dropped, cash flowing rentals no longer cash flowed. People were forced to sell because they didn't have the cash they needed to cover monthly expenses. That was a worst case scenario. How likely is it to happen again? Can I handle it if it does? That's what we all have to decide for ourselves.

I'm not saying 2020-21 will go that route, but if you play out the scenario, and you feel pretty confident that you could make it though a year or two like that then you have nothing to worry about. Don't stretch yourself to the limit, have reserves, plan for unexpected expenses, and rent reductions.

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Chris Mackinlay

Midland, TX · Member since 2015 · 90 posts · 75 votes

6y

If the property value goes down and you're underwater, you keep renting it. If the rent value goes down, you keep renting it because your property should have been a great buy with some buffer against rent decreases.

Just like stocks, do you sell them at a loss when they fall beneath your purchase price?

Only if you like losing money.

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Russell Holmes

Real Estate Broker · Apopka, FL · Member since 2017 · 492 posts · 528 votes

6y

Originally posted by @Frank Hernandez:

@Russell Holmes

1st or second edition of Building wealth... ?

I believe I read the original....didn't realize there was a second. I recall there being some things that were taken with a grain of salt due to the bubble and burst, so the second edition likely is more relevant. It's not so much a 'how to' book as it is one to show the long term power of investments that may not be life changing from day one. Excellent read though. This was actually a book I read before finding bigger pockets, I was hungry for some knowledge and I believe I saw a Facebook post about investing where someone mentioned that book. After I read it, I believe I came across mention of "How to invest with no and low money down" where I kept seeing reference to this weird 'Bigger Pockets' thing.... decided to look into it (March '17) and I've been sticking around learning, reading, and doing ever since!

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Brent Paul

Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes

6y

I buy my properties based on cash flow and not appreciation. It won't hurt me nearly as much as others in high dollar areas that bank on appreciation.

In the event it does happen that doesn't mean you are sunk. You keep on renting out the property and hopefully that value comes back. Your renters continue to pay down your mortgage and you get the cash flow. Everything I own cash flows at least 300 a month. In the rent goes down 50 or even 100 that doesn't affect me too much. Those that have properties and only get a small cash flow of or break even will be hurting.

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What happens if rental property value goes down?

What happens if rental property value goes down?

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