Coming real estate bust?

Question

Joel Owens · Answer

There is a lot of money to be made in any cycle. You just need to constantly watch the data to spot movement in cycles ahead of the herds. If you do something when the herds do then the margins are thinner.

These cycles are not for "dumb money" anymore meaning people that bought at the bottom and made tons of mistakes but through appreciation and rent growth still did well. You do that kind of stuff now and your lunch will be eaten with losses.

If you are experienced or get with someone who is and buy right then you put odds in your favor.

When people start saying you can't lose with buying anything real estate that's when the idiots come out and the uninformed. They blindly buy crap based on a trend which is speculating and not investing. Investing is constantly learning and analyzing data to get experienced to consistently grow a successful portfolio over time based on well thought out decisions. It is not going by what the herds or doing, news stories on TV, a feeling, etc.

Meghan McCallum · Answer

Dave, the sky is always falling. As long as you aren't just trying to make money based on appreciation, bought well, and have a better product of comparable rental opportunities...just keep moving forward. The people who lose in the downfall are those who speculate on real estate (flippers, builders) if you buy and hold and aren't maxed to the gills in debt...you will be fine.

Meghan McCallum · Answer

Buy now, buy in the down turn, buy after the downturn. The advantage of buying now is virtually free money, the advantage of buying in the down turn is lower prices (have cash on hand), advantage of buying on the way back up...banks are happy to loan again and great deals are readily available.

Josiah Mann · Answer

I brought this up in a recent forum post and it's not to be inflammatory or think the sky is falling.

It's because:

• All integrated systems move in cycles. 
• Real estate is an integrated system
• Demographics are the driver of most economic trends (I believe the evidence supports this, though this isn't the widely favored view)
• The baby boomers are retiring and spending less
• Stimulus spending can't fix a demographic problem

That said, I was at a conference in Boston last month with the Dave Lindahl Group who runs the largest multifamily real estate group in the US. He and many other hundred millionaire real estate moguls spoke about the coming downturn in a completely matter of fact manner, advising how to position yourself for it.

In a broad sense, while I don't think being a naysayer or being inflammatory about doom is good, studying economic cycles and their drivers is a worthwhile pursuit.

Jonna Weber · Answer

@Dave Bolduc - At a risk of stating the obvious, the market cycles every 7-10 years.   No doubt it is cooling in some areas, especially in the luxury market.  Every market is local, and it is very important to get to know yours as much as possible.  I agree with @Meghan McCallum - investors shouldn't bet on appreciation to begin with...that is how so many got into trouble last decade.

Darius Hollis · Answer

I was talking to an investor in my area the other day who managed to come out with barely a scratch after 2008 and arguably strengthened his portfolio during the "bust."  We talked about the coming downturn and he said that no individual makes the market, but we can all determine how we approach it. In other words, its all cyclical and the only way a downturn would be a complete disaster is if you have not positioned your current portfolio to keep generating income even through a storm and if you are not managing your assets in order to buy good, cheap deals during the downturn while unprepared competitors are caught off guard. I personally think that a downturn is inevitable, but its far off for many markets, closer for others, but doesn't matter if you prepare properly.

Meghan McCallum · Answer

@Josiah Mann I would be REALLY interested to hear about this:

"Dave Lindahl Group who runs the largest multifamily real estate group in the US. He and many other hundred millionaire real estate moguls spoke about the coming downturn in a completely matter of fact manner, advising how to position yourself for it."

I would love to take it with a grain of salt.

Shane Hedeen · Answer

@Meghan McCallum is 100% spot on here in her post.

In a lot of markets, prices and values are trending very near if not at or above where they were around 2005 and 2006.

More than anything, it's something for people to talk about. Some people also prey on fear of others. Why speculate? To not sound like a complete broken record repeating Meghan's post - buy right. If you are buying rentals, do you have good lending terms? Does it cash flow well? Is it in an area you like?

Real Estate is hyper local. Very few other businesses have two products that are exactly the same, but down the block from each other with wildly different values. Will we see a dip or correction soon? Possible. As long as you aren't buying with the intent of values going up large margins in short periods, you should be okay.

John Thedford · Answer

Bust? Or typical market cycle? I don't know that we will have a bust as we did in 2008 unless we have the same scenario play out with the credit markets, etc. Buy right. Don't over leverage. Have reserves. No worries!

Bill R. · Answer

Perhaps I haven't fully and completely embraced what it means to be a buy and hold investor.  :-)

It kind of sounds strange to me to hear people say, "just buy it right" but don't not invest because you think the market is too frothy (i.e. don't try to time the real estate market).  If you stick to your investment criteria to some extent you're accomplishing the same outcome.

If you decide the market is too frothy and you sit back and wait for it to pull back a bit or for rents to catch up to price appreciation, isn't that the same thing as not deviating from your investment criteria if no deals meet your criteria?  Are you market timing or are you a disciplined investor?  What's the difference?

Obviously it's very different if you can find decent deals all day long and you choose to sit on the sidelines because you think the sky might fall but I don't think that is what most people are asking about when they question whether the market may be running too hot for them to jump in.

Actually, I think it would be interesting to see both scenarios modeled out.  In the stock market buy and hold dollar cost averaging beats out market timing in most models but stocks don't generate cash flow and stocks tend to have far more volatility which means being out of the market on the wrong day can destroy your chances of ever beating the buy and hold investor.

If you are a SFR buy and hold investor and never deviate from the 2% rule and only acquire new properties when you can get a deal where the monthly rents are 2% or greater than the purchase price, even if it means you end up sitting on cash at 1% sometimes for a few years, do you end up better off than someone who randomly invests whenever they have cash available as long as they can get positive cash flow, no matter how slim the margin.

Coming real estate bust?

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