anyone live through the 08 crash with a 4plex in their portfolio?
Colorado Springs, CO · Member since 2018 · 9 posts · 12 votes
anyone live through the 08 crash with a 4plex in their portfolio?
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Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
7yBea,
Congrats! I was an engineer in my previous life who decided to dive in into real estate head first when I recognized an opportunity once in a lifetime in 2009. I've made it in real estate by many people's standard so that engineering degree was worth something.
Along the way, I met an agent who used to own five 4-plexes and five SFHs in San Jose. He lost all five 4-plexes and two SFHs during the downturn. Rents barely dipped during the crash, but his income of $80k/month basically went down to $0 in 2007 and 2008. His $10k/mo of negative cash flow, which was nothing when he was making $80k and could use the write-off, suddenly became a burden. He went through $250k reserves within months. He was able to hang onto the three SFHs which had little debt and positive cash flow.
During the downturn, he used the rents from the 4-plexes and SFHs to pay for his living expenses. He owed the IRS over $500k and about $150k to the FTB. The reason I knew all of this because I bought one of his SFHs during the downturn as a short sale and this information was disclosed on the preliminary title report. We became buddies, and he called me his lucky charm after a few transactions and I helped him with various things.
You're in a much better position in a sense that your 4-plex is cash flowing positive. Cash flow positive is critical. Local population and jobs are critical. Reserve is critical. How much reserve is enough? Run a stress test and see how much you would need to weather a 3 to 5 year downturn. My partner and I ran a stress test for our portfolio. Based on a 25% rent dip, we would need $500k in reserves to weather it for 5 years. That's $100k/year of negative cash flow. We set $500k aside for it. Done!
Hope for the best but prepare for the worst.
Best of luck.
47 Replies
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Bea I did not own any.. but I had multiple clients that bought them in Phoenix.. and they went 100% vacant in droves and they lost them to the bank.. the market for rentals tanked so bad there .. there was not enough blue collar workers to put into them no matter the price.. saw that in Vegas as well.
this was mainly in areas were new construction was HOT and when it stopped it came to a screeching halt and all those sub trades found themselves without a job.. and simply left.
my clients bought multiple MF from me in the Portland Vancouver market.. they lost some value but did not go vacant. these were lawyers and very professional types from SF bay area.. it was a disaster for them multiple foreclosures on their fico's.. it stung bad.
Not saying that will happen in the future as I am gung ho new construction personally.. but it did happen. I saw it.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Ps those units / 4 plexs they paid 350k each for.. by late 09 you could buy them for under 100k each.. I was tempted.
- Colorado Springs, CO · Member since 2018 · 9 posts · 12 votes7y
Jay, Wow! That is scary, thanks for sharing. I wonder if that same scenario would hurt us here? We do have the cushion of 4 large military bases as well. I had to sell a property in 2009 and it hurt, I paid someone $10K to buy it!! But ultimately, it could have been worse, I suppose.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Rents and occupancy held up fine here...my rents actually went up a little. Local property values likely went down 5-10% (varied by sub market). Real estate is very local...and every cycle is different.
Only take advice from people who have done what you want to do. Meet others with empathy.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes7y
That's also the difference between fourplexes and SFR. In Vegas I raised rents all through the "depression/recession" for single family homes.
People losing their homes had zero desire to move back in to an apartment.
We offer 2-3x the space, garages, yards, no shared walls/fellow tenant drama, and in home laundry for a few hundred more than an apartment and less than ownership costs for the people that only put down 3% on a 6% loan.
- 7yMichael DangPro MemberRental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
I have a fourplex back in 2008. Still have it. It's been a very good cash cow. It's always been rented out or quickly filled up because of the area it's in. Plus, I make sure it's a safe clean place to live in.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes7y
Bea,
Congrats! I was an engineer in my previous life who decided to dive in into real estate head first when I recognized an opportunity once in a lifetime in 2009. I've made it in real estate by many people's standard so that engineering degree was worth something.
Along the way, I met an agent who used to own five 4-plexes and five SFHs in San Jose. He lost all five 4-plexes and two SFHs during the downturn. Rents barely dipped during the crash, but his income of $80k/month basically went down to $0 in 2007 and 2008. His $10k/mo of negative cash flow, which was nothing when he was making $80k and could use the write-off, suddenly became a burden. He went through $250k reserves within months. He was able to hang onto the three SFHs which had little debt and positive cash flow.
During the downturn, he used the rents from the 4-plexes and SFHs to pay for his living expenses. He owed the IRS over $500k and about $150k to the FTB. The reason I knew all of this because I bought one of his SFHs during the downturn as a short sale and this information was disclosed on the preliminary title report. We became buddies, and he called me his lucky charm after a few transactions and I helped him with various things.
You're in a much better position in a sense that your 4-plex is cash flowing positive. Cash flow positive is critical. Local population and jobs are critical. Reserve is critical. How much reserve is enough? Run a stress test and see how much you would need to weather a 3 to 5 year downturn. My partner and I ran a stress test for our portfolio. Based on a 25% rent dip, we would need $500k in reserves to weather it for 5 years. That's $100k/year of negative cash flow. We set $500k aside for it. Done!
Hope for the best but prepare for the worst.
Best of luck.
- Member since 2018 · 214 posts · 175 votes7y
Don’t over leverage yourself at this moment. If buying additional property would give you negative cash flow, hold on to it.
If buying additional property and still give you positive cash flow, may be ok to buy more. Agree with Minh Le, save reserve on the side for 5-years back-up in case rent drop 25%.
- Rental Property Investor · Orlando, FL · Member since 2019 · 44 posts · 48 votes7y
Originally posted by @Jay Hinrichs:
Bea I did not own any.. but I had multiple clients that bought them in Phoenix.. and they went 100% vacant in droves and they lost them to the bank.. the market for rentals tanked so bad there .. there was not enough blue collar workers to put into them no matter the price.. saw that in Vegas as well.
this was mainly in areas were new construction was HOT and when it stopped it came to a screeching halt and all those sub trades found themselves without a job.. and simply left.
my clients bought multiple MF from me in the Portland Vancouver market.. they lost some value but did not go vacant. these were lawyers and very professional types from SF bay area.. it was a disaster for them multiple foreclosures on their fico's.. it stung bad.
Not saying that will happen in the future as I am gung ho new construction personally.. but it did happen. I saw it.
Just curious did any of your clients consider renting to Section 8 tenants? As construction jobs dried during that time more folks became reliant on government assistance programs like Section 8. I rented out my SFH to a Section 8 tenant when it lost 50% of its value in 08.
- Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes7y
Up here we lived through the 'recession' with a lot of properties in our portfolio but after 30 years we were all cash but didn't notice any significant pull back or experience any vacancies. One 4-plex (we paid $46K) we had was held contract-for-deed (they put down $8K) & paid us $1300/month for 9.5 years, including all utilities, taxes & maintenance. 6 months ago they got into drugs & we evicted & immediately resold it. BUT we did jump into a property in FL at the mkt bottom!!!
- Rental Property Investor · Toronto, Canada · Member since 2012 · 102 posts · 95 votes7y
@Jay Hinrichs I bought those back then. They rented for $650 per door. I’m Canadian and back then, our dollar was at parity to the USD so it was extra awesome
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Jay Weathersby:
Originally posted by @Jay Hinrichs:
Bea I did not own any.. but I had multiple clients that bought them in Phoenix.. and they went 100% vacant in droves and they lost them to the bank.. the market for rentals tanked so bad there .. there was not enough blue collar workers to put into them no matter the price.. saw that in Vegas as well.
this was mainly in areas were new construction was HOT and when it stopped it came to a screeching halt and all those sub trades found themselves without a job.. and simply left.
my clients bought multiple MF from me in the Portland Vancouver market.. they lost some value but did not go vacant. these were lawyers and very professional types from SF bay area.. it was a disaster for them multiple foreclosures on their fico's.. it stung bad.
Not saying that will happen in the future as I am gung ho new construction personally.. but it did happen. I saw it.
Just curious did any of your clients consider renting to Section 8 tenants? As construction jobs dried during that time more folks became reliant on government assistance programs like Section 8. I rented out my SFH to a Section 8 tenant when it lost 50% of its value in 08.
I suspect a majority of the tenants were not legal.
- Colorado Springs, CO · Member since 2018 · 9 posts · 12 votes7y
@Account Closed, the 4plex we purchased last year was owned by the original owners family, they died and passed it to their children, the children died and their children sold it. They were living out of state and rents had become extremely low. Based on years, it would be a class C but it is in the heart of downtown Colorado Springs which is a very desireable neighborhood.
Anyhow, please elaborate why you think my friends have a point?
- Colorado Springs, CO · Member since 2018 · 9 posts · 12 votes7y
@Account Closed, thank you very much! Your post was super helpful. We have 1 4plex cash flowing at $800-$1000/mo and the break even SFH. I would like to 1031 exchange the SFH, but it seems difficult to pull off. There are not many decent options to purchase and I don't want to be put in the place of making a desperate purchase. We plan to hold it till April 2020. We currently have a bit over $500K in cash. I found another good looking 4plex (I watched every duplex & 4plex that has come up on the market since last Aug, so proprtyies worth purchasing are rare here, most are way overpriced) I loved the stress test, that definitely helps me decide how to move!
- Colorado Springs, CO · Member since 2018 · 9 posts · 12 votes7y
@HT Tony, Colorado Springs, CO
- Commercial Mortgage Broker · San Diego, CA · Member since 2009 · 70 posts · 69 votes7y
The most important factor to determining your sensitivity to a downturn is how much leverage you have.
In the market today, most investors are so eager to purchase that they'll take as much debt or "other people's money" as they can without asking whether they should.
A recession causes problems for real estate investors in two big ways:
1. Decrease in cash flow caused by decreased market demand, leading to lower rents and/or lower occupancy.
2. Decrease in value due to decreased cash flow and investor appetite to purchase.
The first issue is the primary concern for most investors since it raises the question of whether you can make your monthly mortgage payments. However, so long as you have other sources of cash or significant cushion in NOI vs. debt service, you can bridge your way through the recession by continuing to make payments. You can reduce some of the risk here by ensuring you have a fixed rate loan. Even if rates stay low, many adjustable rate mortgages will still increase on the first adjustment.
The second concern is refinancing risk. If your loan has a bullet maturity (i.e. a balloon payment), you will have to refinance or come up with a significant amount of cash to payoff the maturing loan. Both options are difficult in the midst of a recession. You likely won't have as much cash or feel comfortable parting with it during a recession. Refinancing will be tough since (i) your property cash flow likely decreased, (ii) your property value likely decreased, and (iii) lender appetite is lower and their standards are likely higher. These factors can lead to a refinancing gap that requires you come up with a significant amount of cash. You can mitigate this risk entirely by ensuring your loans amortize the entire balance by maturity. You should also consider fixing the rate for as long as possible. On 1-4 unit investments, it's common to have a 30-year fully-fixed fully-amortizing loan. Whereas on 5+ unit investments, a full term fix is unlikely. As such, most investors refinance their adjustable commercial loans as soon as the prepayment premium burns off so they can ensure they have a few years of interest rate protection in case a recession happens in the next couple years.
Ultimately, most recoveries begin within a couple years, even with deep downturns like 2008. As such, the levered investor's goal is to survive the downturn by minimizing demands for cash and structuring their loans wisely.
- Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes7y
My niche is 4plexs, but in Las Vegas. I'm not planning to live through another recession, as my goal is to sell at peak or near peak. As all markets are local, I watch the LV market like a hawk. Many say that no one can time the market, but I am trying. I think LV market is at near peak and can gain through remainder of 2019. However, 2020 can be turning point as will need to see economy, interest rates, jobs, stock market, unemployment, etc.
Who said that you cannot sell at peak and buy again at low?
BTW, guru Jay agrees that it is good time to sell my 4plex in Las Vegas.
Terry
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Terry Lao:
My niche is 4plexs, but in Las Vegas. I'm not planning to live through another recession, as my goal is to sell at peak or near peak. As all markets are local, I watch the LV market like a hawk. Many say that no one can time the market, but I am trying. I think LV market is at near peak and can gain through remainder of 2019. However, 2020 can be turning point as will need to see economy, interest rates, jobs, stock market, unemployment, etc.
Who said that you cannot sell at peak and buy again at low?
BTW, guru Jay agrees that it is good time to sell my 4plex in Las Vegas.
Terry
one of my partners from Honolulu bought 2 or 3 4 plexs's in 2011 that were half destroyed and vacant for about 100k each.. then put 100k into them. and he is selling now also.. for a nice gain.. they were management nightmares though for him so he wants to sell them.. he did though donate them to his charitable foundation.. so not every one is in the financial position he is in.. he also bought about 6 SFRs at the time and killed it in Vegas with those.. no real cash flow but they more than doubled. cash flow was enough to cover costs. not sure why people don't understand that its not all about generating positive cash flow if you can choose the markets correctly.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
We owned a quad, duplex, and SFR in San Diego. The quad and SFR lost value but the rent remained flat. This is because there were people increasing their occupancy but the banks also had possession of many empty properties. Demand for rentals therefore stayed high.
The duplex we had prior to the Great Recession one unit STR all year and the other unit STR in summer only and LTR in the academic year. We had to convert away from STR in the off season on the one unit that was STR year round so its cash flow was reduced a little. We had purchased the duplex using estimates that only had us having STR in summer so we basically fell back to what we used in our projections. So instead of out performing projections, it only met projections. Similar to the other units, the LTR rent did not decline. Our cash flow was impacted solely due to converting one unit in the off season from STR to LTR.
Note our STR was not beach front, it is I think 5 houses from the beach with virtually zero beach view. When the vacation crowd diminishes, the rent prices fall and the prime properties are still prime but the RE that is just below prime may struggle.
Today, and for the past couple years, both units of the duplex are STR all year and are booked virtually 100%. In addition, the value of each of the San Diego properties is at their all time peak.
So my advice is do not over leverage. If you are not over leveraged, you increase the odds you can ride out any recession. The prices will come back up, they always have.
Good luck
- Member since 2019 · 67 posts · 34 votes7y
@Bea Leichliter
Great question Bea! I’m an engineer by trade myself and have started investing in real estate about 2 years ago. Your post has answered a lot of the same questions I have in mind. Just wanna day thanks!
- Jack
- Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 360 posts · 213 votes7y
@Bea Leichliter I find hard to believe that someone will not be able to pay $200 to $350 a month on rent. I think you will be good for a long time and will get the benefit of the appraiser in the future..
You are good ( YOU Started) and you are committed and determined for your financial independence, SO I acknowledge you for that.
In the other hand, Ingeneers tent to be very analytical and slow to act, always thinking on the risk factor and minimizing risk. Well, RE like any other entrepreneurial business has Risks, But guess what, with wisdom, knowledge, practice and a great community like BP you will minimize those risks.. :)
Regards
- Professional · Anaheim, CA · Member since 2017 · 1k+ posts · 686 votes7y
From what I've read and opinion of others, 2008 was an exception. The perfect storm of greedy sellers, unqualified borrowers, unscrupulous lenders, speculative buyers, unrealistic appraisals, wall street greed, etc.
Next downturn, maybe 10-15%.
IMO, Terry
- Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes7y
Originally posted by @Bea Leichliter:
Hi all,
I am a real estate agent and a new multifamily investor. I have 1 4plex purchased last August cash flowing at about $1000/mo and a SFH rental which funded the multifamily and breaks even. We are working on our second multifamily deal, which will cash flow $1000-$1400/mo.
Prior to being an agent, I spent 20 years as an engineer. My husband is an engineer and all of my friends are engineers.
My engineer friends are calling us stupid for investing in a peaking market. I have run the scenarios, done the spreadsheets and have a successful 4plex under my belt, but I have not lived through a recession with a 4plex in my portfolio. Does anyone have experience with the last recession and a 4plex? Can you share your experience?
BTW, I am in a Colorado Springs which is currently experiencing huge economic and population growth.
TIA
BEA
Bea, I've owned MFs and went through the recession in 2008 - and I LOVED IT!
Part of the reason why I've acquired over 1,000 apartment units is due in large part because of the recession. That was bargain hunting and I wish another 2008 happens.
If the cashflow of $1200 a month for your 4-plex is real (after all expenses including factoring in for capital expenditures), then you're NOT nuts for buying APARTMENTS (or MFs) in this market.
When the economy contracts, people usually rent when they lost their homes. And USUALLY (not always), rents in apartments are CHEAPER than houses. So apartments tend to get affected less by economic contraction than houses.
Now - that's based on the assumption you have long term financing in place.
If however, you have financing that will end in 5 years, then that's not a good idea. That's how other apartment investors got into trouble back in 2008. I know some of them with apartments that are making money but the borrower-owner needed to refinance but no one wanted to lend money so their properties went into foreclosure!
And by the way, I am still buying MFs even NOW when the market is "HIGH". Now - that's just me - and that's because I am REALLY GOOD at finding good deals (and extremely conservative with my underwriting).
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