How to survive the next downturn?

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How to survive the next downturn?

Chris Youssi
Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes

The purpose of this forum will be to give practical solutions vs pulling the "crash n crush" alarm like a previous thread. I have a few suggestions that I have implemented and am interested in hearing from other investors. Here are my top 3:

1.) Lock in as much long term funding as possible. Eg... if you qualify for the secondary market grab 10 props  ( up to 40 units as you are able to buy up to a 4 unit and still qualify for secondary market funding ) where you can lock in up to 30 year money. Commercial world lock in for a minimum of 5 years -some lenders are allowing 7 and I am exploring 1 that is a 10 / 1 arm very appealing to me personally

2.) Always develop an exit strategy when you make a purchase. Key is having the discipline to follow thru with the understanding that sometimes life can get in the way and our circumstances change. 

3.) Lastly is you make money on the buy not the sell. Personally I feel this is far more important than location for the simple reason that if you purchase the property correctly location is simply an added bonus.

Some of my thoughts. Looking forward to hearing from others .

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Krishna Chava
Specialist · Carrollton, TX · Member since 2016 · 145 posts · 100 votes
8y

I have bought several properties over last 2 years and I have paused now mainly because of steep climb in interest rates. Speed at which interest rates have climbed is more of concern that interest rates themselves. Here are my strategies to make my properties hardier for a recession hit:

1) Using cash flow, pay of all short term debt, from friends and family and some credit cards. 

2) Make sure all the deposits collected from tenants is in a separate accounts and is not touched by daily operations. This might be requirement in same states, not Texas.

3) Use the cash flow to fix problems that have a longer term ROI like replacing AC on last legs or a fence that needs to be replaced in next 2 years anyway. Make your current properties better such that you will have less repairs later or you can defer repairs when times are not good.

4) Self manage your properties if you can. Management expense is a huge cushion when things go south. Not only can you save 10% of gross rent but you have better control over repair decisions and you can defer non emergency ones based on your financial situation. There are many technologies that make self managing very different than 10 years ago.

Krishna.

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  • Krishna Chava
    Specialist · Carrollton, TX · Member since 2016 · 145 posts · 100 votes
    8y

    I have bought several properties over last 2 years and I have paused now mainly because of steep climb in interest rates. Speed at which interest rates have climbed is more of concern that interest rates themselves. Here are my strategies to make my properties hardier for a recession hit:

    1) Using cash flow, pay of all short term debt, from friends and family and some credit cards. 

    2) Make sure all the deposits collected from tenants is in a separate accounts and is not touched by daily operations. This might be requirement in same states, not Texas.

    3) Use the cash flow to fix problems that have a longer term ROI like replacing AC on last legs or a fence that needs to be replaced in next 2 years anyway. Make your current properties better such that you will have less repairs later or you can defer repairs when times are not good.

    4) Self manage your properties if you can. Management expense is a huge cushion when things go south. Not only can you save 10% of gross rent but you have better control over repair decisions and you can defer non emergency ones based on your financial situation. There are many technologies that make self managing very different than 10 years ago.

    Krishna.

    4Reply
  • Krishna Chava
    Specialist · Carrollton, TX · Member since 2016 · 145 posts · 100 votes
    8y

    I have bought several properties over last 2 years and I have paused now mainly because of steep climb in interest rates. Speed at which interest rates have climbed is more of concern that interest rates themselves. Here are my strategies to make my properties hardier for a recession hit:

    1) Using cash flow, pay of all short term debt, from friends and family and some credit cards. 

    2) Make sure all the deposits collected from tenants is in a separate accounts and is not touched by daily operations. This might be requirement in same states, not Texas.

    3) Use the cash flow to fix problems that have a longer term ROI like replacing AC on last legs or a fence that needs to be replaced in next 2 years anyway. Make your current properties better such that you will have less repairs later or you can defer repairs when times are not good.

    4) Self manage your properties if you can. Management expense is a huge cushion when things go south. Not only can you save 10% of gross rent but you have better control over repair decisions and you can defer non emergency ones based on your financial situation. There are many technologies that make self managing very different than 10 years ago.

    Krishna.

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    I spoke to 3 realtors today. Some we sort know each other. Others are total strangers. All voice their opinion from their heart homes are overpriced. Since last fall prices have gone up 30-40% in Silicon Valley. All these properties were doable at 40-50 cents a dollar about 4 years ago.  Most have purchased investment properties even lower price during the trough which is not long ago. All NOW carry low loan balances and live in same home.  

    One needs an exist strategy, if you have multiple loans and hoping tenants will foot most of them. You could head for a surprise. Those with a variable mortgage (e.g. 5 year, 7 year etc) chances you are in the middle of a recession when the interest hike kicks in. The domino effect will eat your equity as well as life savings.

    Unload the properties while you think it is the peak price.  This is especially in States with high property taxes and lower income. Midwest will always look cheap and move up slower but the downside risk is higher.  Consolidate your holdings so it is manageable.    

    1Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    8y

    To me I don’t survive downturn or upturns.  

    My plan is always to succeed in either 

    0Reply
  • Maurice D.
    Coppell, TX · Member since 2015 · 485 posts · 310 votes
    8y

    sell on the news.. buy on the rumor.

    :)

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y

    Canned goods and bottled water

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    4Reply
  • Jack McTavish
    Flipper/Rehabber · Portland, OR · Member since 2018 · 30 posts · 12 votes
    8y

    Some great information stored on this thread, I really wish biggerpockets had a way to favorite conversations, so I can revisit them. I would love to see what other ideas will be posted to this discussion.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y

    + good locations

    + add value

    + cash flow

    + prudent leverage

    + long-term debt

    = improved chances of success in up and down markets

    Deal flow is king right now.  I am investing more with others who have mature deal flow pipelines (#3 on your list) and reallocating value plays to more cash flow plays (while always adding value).

    1Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    8y

    I sold my home on the West coast three years ago because I wanted to retire and move to an area with a lower cost of living. I'm not sure what I want to do where I'm living now (rent or own), but I have the cash parked in a high-yield savings account that pays me to wait while I sort it out. As a renter, I have "location freedom" in that I can change addresses relatively quickly when compared to owning a home that might not sell right away. When the property market tumbles (if it does), I'm in a position to scoop up a bargain. I'm using my time to learn how to identify that bargain when it walks up and introduces itself to me.

    I keep a couple of years of living expenses in cash savings (often recommended for retirees) so I don't panic if the stock market sells off. I use my credit cards as debit cards by paying them off whenever I make a purchase. I'm also toe-dipping in crowdfunding. I'll expand my activities in this space if I have a profitable experience over the next couple of years. I consider crowdfunding to be a stepping stone to direct real estate investing.

    1Reply
  • Chris Youssi
    OP
    Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes
    8y
    Originally posted by @Jack McTavish:

    Some great information stored on this thread, I really wish biggerpockets had a way to favorite conversations, so I can revisit them. I would love to see what other ideas will be posted to this discussion.

     Go to followed then my discussion and you can get any updates on this thread

    0Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    Here’s my strategy:

    1)  invest in conservatively underwritten debt.  Then if we do have a bad downturn, I  will be doing the foreclosing instead of getting foreclosed on, and picking up properties at pennies on the dollar. 

    2)  for equity investments,  avoid short and medium-term debt.  If the recession is severe, bank lending will dry up, these loans won’t be able to refinance and investments  will crash.  Instead, lock in long-term 7-10 year+ debt at a low fixed rate cost. 

    2b) Keep all debt ratios conservative to minimize the risk of default. (65% LTV or less). Or even go no debt on a core portion of the portfolio to remove any chance of default .

    2c)  for syndications and crowdfunding, I limit myself to sponsors that have full real estate cycle experience, and did not lose money in the last downturn. 

    The Real Estate Crowdfunding Review
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    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    In a down turn never carry a non paying tenant. Compassion will be a investors down fall. The worse the economy the faster you must begin eviction proceedings and the less room for compassion. Always place the health of your business ahead of the individual.

    This is what seperates successful profesional landlords from bankrupt hobby landlords.

    2Reply
  • Chris Youssi
    OP
    Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes
    8y
    Originally posted by @Thomas S.:

    In a down turn never carry a non paying tenant. Compassion will be a investors down fall. The worse the economy the faster you must begin eviction proceedings and the less room for compassion. Always place the health of your business ahead of the individual.

    This is what seperates successful profesional landlords from bankrupt hobby landlords.

    Agree with you here with one add. I try and treat all my investments like my business all the time every day because I'm sure most of us who have been in this for any length of time recognize tenants can be very crafty.Hate to say it but when it is applied keeps you focused " always assume a tenant is lying!" and you will be protected in all markets.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    " always assume a tenant is lying!" and you will be protected in all markets.

    Agreed. Regardless of the economy always immediately issue notice and let it play out. Unfortunately many landlord/investors have very little understanding of business or people and will fall back on the old adage that it is too expensive to turn over a tenant. They allow tenants to fall behind and prey to their chosen deity that it will work out, which it never does. Regrettably this is often the case because they have zero business skills and can not turn over efficiently. For those that do not have experience evicting and turning over units efficiently, out of fear of actually managing a property, they tend to lose everything in a down turn market.

    Experience with evictions is actually good for business. Same holds true for turn overs, the more you do the better you get and the stronger your business will ultimately be during hard times.  

    0Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Chris Youssi I disagree that any of your top 3 will protect you from a major down turn. Getting more debt, which can be called during a downturn, isn't a great plan. People should always have an exit strategy, but in a downturn selling may not be an option. Making money on the buy is an old saying, but it is really making equity on the buy. The equity does not monetize until you refinance or sell, which in a downturn may not result in much depending on the severity of the downturn. I submit that cash flow survives all downturns. If you have enough cash flow, you can weather the storm and even purchase discounted deals during the storm.

    1Reply
  • Chris Youssi
    OP
    Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes
    8y
    Originally posted by @Anthony Dooley:

    @Chris Youssi I disagree that any of your top 3 will protect you from a major down turn 

    My first comment :."Lock in as much long term funding as possible!" followed by the idea IF you can /are going to purchase this will help you survive. I can see how this would be misunderstood. 

    Getting more debt, which can be called during a downturn, isn't a great plan. People should always have an exit strategy, 

    My second comment: "Always develop an exit strategy when you make a purchase." so i guess you do agree with this or maybe you don't not sure -perhaps you agreed before you disagreed?
     

     but in a downturn selling may not be an option. Making money on the buy is an old saying, but it is really making equity on the buy.

    My final comment "Lastly is you make money on the buy not the sell." regardless of it's age will withstand the test of time for the simple reason that purchasing properly regardless of market conditions greatly enhances your odds of having equity. Maybe saying the same thing different way.
     

    The equity does not monetize until you refinance or sell, which in a downturn may not result in much depending on the severity of the downturn. I submit that cash flow survives all downturns. If you have enough cash flow, you can weather the storm and even purchase discounted deals during the storm.

    I wholeheartedly agree cash flow will survive all downturns and the bonus of tenants paying down debt.

    0Reply
  • Jeffrey Holst
    Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
    8y
    To me it's all about cash flow. The rest is just noise. What I saw during the last drop is that rents stayed the same they didn't go up but they also didn't go down expenses stayed about the same or even went slightly down as contractors became less busy and we're willing to work for less. If you cash flow conservatively now then you should cash flow during whatever drop might come. This really isn't a guarantee but that's as close as you'll get an investment world. Choose solidly cash flowing properties now and if you can't find them don't buy anything. When and if a crash comes choose solidly cash flowing properties and if you can't find them don't buy anything. pretty much all the time choose solidly cash flowing properties and you won't regret it.
    4Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Chris Youssi please do not take offense to my disagreement. My opinion is mine. There are only three exit strategies that I know of, so having an exit strategy isn't really a strategy for protecting you during a downturn. You can refinance or sell which may not be useful during a downturn. Lending may dry up and prices would be down. The other strategy is to hold. If the property cash flows, holding works. If it doesn't cash flow, you will lose it. Securing a ton of debt is great while everything is great, but a bank can call your loans due if they get spooked. They call it technical default, even if you are making the payments. If your net worth or income changes significantly. If the property value drops significantly, or for a number of reasons. When the lender gets scared, they can call the loan and foreclose. 

    0Reply
  • Chris Youssi
    OP
    Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes
    8y
    Originally posted by @Anthony Dooley:

    @Chris Youssi please do not take offense to my disagreement. My opinion is mine. There are only three exit strategies that I know of, so having an exit strategy isn't really a strategy for protecting you during a downturn. You can refinance or sell which may not be useful during a downturn. Lending may dry up and prices would be down. The other strategy is to hold. If the property cash flows, holding works. If it doesn't cash flow, you will lose it. Securing a ton of debt is great while everything is great, but a bank can call your loans due if they get spooked. They call it technical default, even if you are making the payments. If your net worth or income changes significantly. If the property value drops significantly, or for a number of reasons. When the lender gets scared, they can call the loan and foreclose. 

    THX for the post appreciated none taken. One comment has me very intrigued and have been doing this for quite awhile so hoping you enlighten me on Technical default and where this has taken place? Commercial lending for sure, what about the secondary market?

    THX

    0Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    It can definitely happen on commercial loans, which is how I do most of my deals these days. The last financial crisis was less about home value and more about financial institutions doing stupid stuff. If you have one loan on an SFR, then there is little risk of them calling it. A bank in trouble, or if they are taken over, may call all of their loans, but most likely the big balances first. Technical default examples: not maintaining insurance on the property, delinquent property taxes, or maintaining a certain occupancy in a multi-family property.

    0Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    8y
    Originally posted by @Jeffrey Holst:
    To me it's all about cash flow. The rest is just noise. What I saw during the last drop is that rents stayed the same they didn't go up but they also didn't go down expenses stayed about the same or even went slightly down as contractors became less busy and we're willing to work for less. If you cash flow conservatively now then you should cash flow during whatever drop might come. This really isn't a guarantee but that's as close as you'll get an investment world. Choose solidly cash flowing properties now and if you can't find them don't buy anything. When and if a crash comes choose solidly cash flowing properties and if you can't find them don't buy anything. pretty much all the time choose solidly cash flowing properties and you won't regret it.

    During the 2008 meltdown, I knew of landlords who got into trouble when their tenants lost their jobs and stopped paying the rent. Finding replacement tenants was not easy because many people were out of work and couldn't afford to pay the rent. Vacant houses were often burglarized because the copper wiring was worth a lot of money. Those who wanted to sell had to lower their asking price, which created a vicious downward spiral, since once one seller did it, other sellers had to follow to stay competitive.

    These "100 year floods" may not happen that often, but investors need to think through them ahead of time ("mental rehearsal") to know what they are going to do should they ever occur. Real estate, the stock market, the job market, the economy, whatever. Stuff happens. 

    1Reply
  • Kathie Riedel
    Investor · Hot Springs Village, AR · Member since 2018 · 112 posts · 56 votes
    8y

    @Sam Shueh Agree with your approach. Perhaps because that is what I did. Sold my 2 rentals in California for an outrageous profit. Moved to AR. Met a bunch of people in real estate and now function as a private lender. If everything tanks I may have to foreclose and sell properties for less than the loan amount but will have enough cash to live a comfortable life.

    2Reply
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