Updated over 8 years ago on . Most recent reply
"The Crash" in Real Estate
Back in 2007-2008, the market "crashed". Can someone explain to me what that did to RE? I do not understand that if you had rental properties or lease option properties why did one loose their $$$, if they were making payments on the mortgage. Thank you
Most Popular Reply
@Mary Stead If you owned property that did not have too much debt on it and you were able to continue to make your debt payments with the cash flow, then nothing happened to you except . . .
If you purchased in a marginal market at an inflated price, you lost a great deal of your equity or even might have been underwater. You were either looking at a situation in which you might never recover your equity or it might take decades. There are markets in which the prices have still not returned to the pre-crash highs, so if you bought at the high, you are still in the red on your property.
This highlights why it is essential to invest for cash flow and not appreciation. If you invest for cash flow, and you buy with enough margin of safety, then you can ride out whatever comes. You may lose equity, but you can afford to hold onto the property until the markets rise again and fix the problem for you.
On the other hand, if you invest only for appreciation (i.e., you are breaking even or losing money month-to-month, and you are willing to do this because you think one day you will sell the property for a lot of money), then when property values crash you are looking at paying out of pocket for a property on which you may be in the red for years, if not forever. If something happens to you, and you cannot cover the debt service, then you are looking at foreclosure.
You don't want to be making payments on the mortgage. You want your tenants to be making payments on the mortgage (and insurance, and taxes, and landscaping, and all the other expenses of owning property). If the rents are not covering all these expenses, and providing you with a profit after a reasonable vacancy expense deduction, don't do the deal!