Downturn Scares? Preparation?
Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
Downturn Scares? Preparation?
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Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
8yStock up on McRibs while you can. The end is nigh. I've seen it in the coffee grounds.
61 Replies
- 8yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
@David Zheng Although we have been in a long Bull run for some time.
The economy is doing great.
Unemployment is at an all time low.
There are more jobs available that people to fill them.
The stock market is at an all time high (some say due for a correction)
Our Country is combating the trade deficit, which will further strengthen our economy and country.
It is still a sellers market and if you buy right and there is a bubble you should be relatively safe.
Banks aren't likely to call loans for a rescission if we were to have one.
People will always need a place to live. High end rentals would be hurt more than working class homes.
If you are cash flowing it isn't the end of the world if your properties appraise for a little less they can still cash flow till there paid off.
It would need to get pretty ugly before you would need to worry.
Regardless of your political opinions you can't argue with the facts of how well and how long the economy has been doing this well. It is breaking all the rules and will likely continue to do so. Yes it will likely correct at some point, but that is natural.
Just my opinion.
- Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes8y
@David Zheng, even with your scenario, what if YOU are the one to lose your job? Is your rental income enough to sustain you? If not, you may not be able to make those payments.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
this is starting to become a self fulfilling prophecy.. for not reason other than the market is returning to balance.
the risk in landlording is your units go vacant which did happen in 08.. or get run down and you do not have the funds to properly maintain them because you only have enough income to cover fixed debt.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes8y
That's a great point you make and I have ALWAYS thought that myself.
I've thought, so what if we have a downturn. My property values might take a tumble, but I don't really care. I'm not looking to sell or refinance. My properties are there as rentals and that's it.
Grant Cardone calls the price range 800-1200/month "recession proof". If anything I think a downturn and people losing jobs will increase the demand for my 750-1000 rental prices.
When it comes to banks calling your notes due....that is kind of a concern I would have. Commercial loans have those "re-appraisal" clauses in them. (depending). A bank can re-appraise your loan and decide if you don't have enough skin in the game, they will demand you put more money down.
This, from what I know, has only happened twice-
Savings and loan crisis (1990s? I think?) When banks were paying a higher rate on their deposits than they were collecting on their loans
2008 financial crisis- where a mortgage was $500k on a house that is now worth $100k
With all that being said I have personally never experienced a true, nationwide downturn. In my current market I am experiencing a downturn at the moment from what it was 2 years ago. I've thus adjusted my strategy.
As they say in the Marines-Improvise, Adapt, and Overcome
- Member since 2016 · 13k+ posts · 12k+ votes8y
There are all sorts of risks every day in this business. They do not necessarily increase with a down turn in the market based on leverage. Assuming you are prepared.
Rental demand may or may not increase, rents may or may not go up or down, the sky may fall. No one knows but assuming you have numerous units, not just a single SFH, positive cash flow and reserves being leveraged or not is relatively unimportant. If you are ready a downturn is a good thing provided you are not using real estate to hoard cash. Personally I am highly leveraged and have no concerns about a down turn although if I was younger I would be saving cash right now to take advantage when it does happen. If you are prepared don't waste your effort worrying.
On the other hand if everything about your business is operating on a raisers edge it does not take a correction to sink your ship.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y@David Zheng I am not going to get into whether or not a recession is coming. These posts happen every week. The economy is going well and likely will continue through at least end of next year. I believe recession will come middle 2020, give or take. How bad or how light it would be is anyone’s guess. Instead of going into the weeds on this again, I want to know how leveraged are you? If it’s 75 percent LTV or less I would considering deleveraging some. I personally wIll aIm for 35 percent portfolIo equity by then. Also if I recall didn’t you buy a Ferrari lol? Why are you worried about too much leverage if you’re buying a Ferrari?
- Rental Property Investor · Los Angeles, CA · Member since 2011 · 122 posts · 67 votes8y
There have been many posts on this. I think I see one almost every other day lol. This downturn will happen eventually, no one knows.
I have a friend that has been on the sidelines for the stock market since 2013. He has missed out on some great gains, even with just completely passive index funds!
Don't over leverage yourself, have a healthy reserve fund, underwrite conservatively, and make sure you're in a market with strong employment. If you bought right, you'll be just fine :)
- 8yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
The downturn in '08 created opportunity- it's all relative. When the market is down, there will be deals everywhere, but you'll likely need to buy with cash, it will be tough to get a loan, rents will be stagnant, etc. When the market is great, deals are tough to find, but money is plentiful.
Personally, I don't worry what the market is doing, put yourself in a position to pick up a deal when you see one- if you are leveraging and the cash flow is there, you will be fine regardless. Buy right, sleep tight. I should trademark that, right?
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
Not to long ago someone wrote how commercial borrowers could lose it all even if there were no downturn. It had to do with the balloons in the 5th-7th year. Rising interest rates, no growth in rents, higher expenses, all meant the property appraised less. Resulting in the owner being unable to refi as he has no cash to make up the difference.....and boom. Foreclosure proceedings start.
Figuring out how you are going to handle your 5 year balloon should be done day 1 after closing.
I got those calls monthly during the recession years.. balloons due bank would not extend and wanted to be paid off.. ergo they call us the HML.. we could not help them deals were too big.. now with the amount of private money that has entered the market in the last 5 years that maybe an option.. but it will be at 10% or more APRs and there goes any cash flow.. those signing up for 5 year or 7 year call loans take on some big risk if they are not very well cashed up.. max leverage and a call loan = risk..
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
Not to long ago someone wrote how commercial borrowers could lose it all even if there were no downturn. It had to do with the balloons in the 5th-7th year. Rising interest rates, no growth in rents, higher expenses, all meant the property appraised less. Resulting in the owner being unable to refi as he has no cash to make up the difference.....and boom. Foreclosure proceedings start.
Figuring out how you are going to handle your 5 year balloon should be done day 1 after closing.
also many commercial loans will have covenants that require addition of equity if values drop.. also capital requirements for the owners..
- Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I got those calls monthly during the recession years.. balloons due bank would not extend and wanted to be paid off.. ergo they call us the HML.. we could not help them deals were too big.. now with the amount of private money that has entered the market in the last 5 years that maybe an option.. but it will be at 10% or more APRs and there goes any cash flow.. those signing up for 5 year or 7 year call loans take on some big risk if they are not very well cashed up.. max leverage and a call loan = risk..
So what happens on all of these syndicated deals in which the interest rates are accelerated 12 months into a 24 month rehab/re-positioning play?
DL
- Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes8y@Jay Hinrichs I didn’t invest in the last downturn . What was the ability to get bank loans on rental property like during that time (06-09) ? Because in the future correction i assume the deals will be great but it’s going to be a cash buyers market and leverage might be tricky . What do you think jay ?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes8y
Originally posted by @Jay Hinrichs:
this is starting to become a self fulfilling prophecy.. for not reason other than the market is returning to balance.
the risk in landlording is your units go vacant which did happen in 08.. or get run down and you do not have the funds to properly maintain them because you only have enough income to cover fixed debt.
I so completely agree! The trick is to be well-enough capitalized to buy more, much more, when it happens. Jay - I'll be calling you!
- Rental Property Investor · Austin, TX · Member since 2013 · 118 posts · 98 votes8y@David Zheng Maybe the risk is on your #2? You can break even on mortgage/tax/insurance but do you have backup reserves for a major capex? If not, guess that could cause the spiral down. Or maybe a capex item isn’t an issue, but if rents only cover your mortgage/tax/insurance, do you have enough at that point to cover your own living expenses?
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Dennis M.:
@Jay HinrichsI didn’t invest in the last downturn . What was the ability to get bank loans on rental property like during that time (06-09) ? Because in the future correction i assume the deals will be great but it’s going to be a cash buyers market and leverage might be tricky . What do you think jay ?
I ended up foreclosing on 200 investors who could not refi.. refi's were not happening banks were NOT making loans..
but not predicting that.. they were not loaning to anyone.. I got 30 million of credit lines called as well.. ouchie.
- Mooresville, NC · Member since 2013 · 16 posts · 25 votes8y
Why do so many people here think that the last housing crash is some how part of the normal real estate cycle?
Spoiler Alert: It’s not. Prices are right where they should be in most of the country.
If I were to listen to the average poster here I would just wait for “the next crash” and scoop up properties for 50% of the value they are today. Any day now.........
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Commercial loans definitely carry more risk than fixed residential. Why do you think they need to see your financials every year? Nothing better to do?
When that 5 (7 In your case?) year call comes and the committee meets, you may be called whether you've performed as a borrower or not. During the GRC, loans were being called because of regulatory uncertainty. They were nervous and waiting for Washington to make up their mind. Didn't matter what you did.
Also during the recession as Jay mentioned, lots and lots of credit lines were being closed or frozen. My business credit, Helocs, credit cards, you name it. Have reserves. I had credit cards in the 0% introductory period get jacked to 29.9% penalty pricing just because they could and THEY were struggling. Lots of fine print.
I saw A class rentals get hit the hardest with vacancies and offer the most incentives. Stay in the 'just right' category, like b class. Nice, but still affordable for the most people you want.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Dennis M.:
@Jay HinrichsI didn’t invest in the last downturn . What was the ability to get bank loans on rental property like during that time (06-09) ? Because in the future correction i assume the deals will be great but it’s going to be a cash buyers market and leverage might be tricky . What do you think jay ?
Good Morning Dennis, I wanted to add that the reason the real estate also fell so far and so fast in certain areas was as I said NO loans for investors.. so everything went to cash... and those that had it just followed the market down.. I was buying foreclosures in Ft. Meyers ( lehigh Acres) on brand new or near new constructed homes ( minus Chinese drywall) for 25 to 40k each.. these homes 5 years before were selling for 250k.. in my mind in that time in space.. that was probably one of the cheapest places in the first world to live..
brand new our near new home for 30k US health fire and police.. all those things considered... and of course I sold them right away mainly to Germans for 50 to 60k apiece so we took our 15 to 25k profits and did that for a year or so then went to Atlanta and was getting smokin deals there I think I bought 54 in one year at courthouse there then the big hedge funds came in and kicked us to the curb.. we kept those though and then rolled them all up and sold them all at once to a HEDGE fund.. doubled our money in 18 months on those. Cash is what you need in that kind of melt down but I never had seen credit freeze like that before and hopefully never will.
For me if I was thinking there was going to be another market correction of that magnitude I would have my powder dry and have my commercial bank in tow.. my one major commercial bank stuck with me and kept our credit in the mid 7 figures but we were on 90 day reviews full financial every 90 days.. it was an odd time.
I also like to say what would happen to the auto industry if there was no credit. How many 80k escalades would be rolling out the door..
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
Not to long ago someone wrote how commercial borrowers could lose it all even if there were no downturn. It had to do with the balloons in the 5th-7th year. Rising interest rates, no growth in rents, higher expenses, all meant the property appraised less. Resulting in the owner being unable to refi as he has no cash to make up the difference.....and boom. Foreclosure proceedings start.
Figuring out how you are going to handle your 5 year balloon should be done day 1 after closing.
I got those calls monthly during the recession years.. balloons due bank would not extend and wanted to be paid off.. ergo they call us the HML.. we could not help them deals were too big.. now with the amount of private money that has entered the market in the last 5 years that maybe an option.. but it will be at 10% or more APRs and there goes any cash flow.. those signing up for 5 year or 7 year call loans take on some big risk if they are not very well cashed up.. max leverage and a call loan = risk..
This is why I don't touch balloon mortgages. That's what everyone seems to be offering me. But I just don't see the appeal, for myself nor the lender. Especially in an environment of high prices and rising rates. I'd rather fully amortize over the same 5-7 year term.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8y@Jay Hinrichs Interesting story about selling the Florida homes to Germans . Did you target foreign buyers at all or they just happened to be buyers from Germany interested? Sold a group of Jacksonville,FL homes to a French buyer few years ago . He was buying them for his daughter is what he said . With those cheaper homes packaging together like you did really seems to be the way to go even if you are giving a discount to market price. Regarding financing with cars , it seems that many dealers aren’t even verifying income . Seems much easier to buy a $80k car versus an $80k house especially if you have decent credit .
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Leverage is way down on my list of concerns. I can't relate to purchasing properties where extended vacancy and not being able to pay mortgages could be a problem.
Leverage by itself is not risky. But high leverage, combined with things like a cyclical property, low cash flow, short-term debt, problematic locations, low reserves, etc. is risky. BP posts have tendency to be too broad and include high, but prudent, leverage in with other reckless leverage strategies.
- Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes8y
So to answer a lot of comments or questions
I don't really care when a downturn is happening or when it will happen. It's going to happen. I'm just seeing if I have my bases covered.
@Ray Harrell My net rental income comes in at 4x my regular W2 job, so I'm not too worried.@Jay Hinrichs but it my rentals are in a highly populated area. strong businesses, universities, hospitals, etc for the past 200 years. how worried should I be that I can't find renters?
@Caleb Heimsoth I'm about 75% leveraged across all my properties right now because I've been taking money out and buying more properties at 75% ltv. and yes I bought a lambo. but that doesn't mean I shouldn't be worried in case of a downturn. unless you assume people with any kind of extracurricular material item isn't allowed to worry about their finances. but tell me why I need 35% equity in my properties if 1. I have long term conventional loans 2. commercial loans that i'm only into year 1 or 2 with a balloon at the end of 7 years. terms where banks cannot call my loan due or a re-appraisal as long as I'm making mortgage payments.
@Account Closed with the balloons I have I think the max they can raise it is 3% a year, I figured in general, I would be able to take a 6% rise in rates. and in two yeas, I'd hope the govt would stop raising it that crazy, cause it would hurt other people more than me. - 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @David Zheng:
So to answer a lot of comments or questions
I don't really care when a downturn is happening or when it will happen. It's going to happen. I'm just seeing if I have my bases covered.
@Ray Harrell My net rental income comes in at 4x my regular W2 job, so I'm not too worried.@Jay Hinrichs but it my rentals are in a highly populated area. strong businesses, universities, hospitals, etc for the past 200 years. how worried should I be that I can't find renters?
@Caleb Heimsoth I'm about 75% leveraged across all my properties right now because I've been taking money out and buying more properties at 75% ltv. and yes I bought a lambo. but that doesn't mean I shouldn't be worried in case of a downturn. unless you assume people with any kind of extracurricular material item isn't allowed to worry about their finances. but tell me why I need 35% equity in my properties if 1. I have long term conventional loans 2. commercial loans that i'm only into year 1 or 2 with a balloon at the end of 7 years. terms where banks cannot call my loan due or a re-appraisal as long as I'm making mortgage payments.
@Account Closed its true I've been socking my CAPEX back into purchasing new buildings and I totally agree, I need to build more of a cash reserve. However I probably should point out that a 25-35% drop in rents with me covering my fixed costs in addition to a 10% capex fund. so realistically I can take a 35-45% hit and still stay solvent. I just need to find cheaper contractors and not reap any profits
@Steve Vaughan I'm in year 1 or 2 of these loans right now. I figured if a crash happened in years 2-4, I would have 3-5 years beyond that to adapt my strategies by either socking more of my returns into paying off the mortgage, selling off places etc.
@Sam B. with the balloons I have I think the max they can raise it is 3% a year, I figured in general, I would be able to take a 6% rise in rates. and in two yeas, I'd hope the govt would stop raising it that crazy, cause it would hurt other people more than me.probably not worried at all.. I think most of this stuff is blown.. over and over reacting to a once in a life time crash that was 08.. markets always ebb and flow that's the reality.. it cant always be red hot.. it can be hot and it can be cool. or just warm.. but crash's don't come every 10 years.. slow downs can but not a full blown crash like we saw.
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