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
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y
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 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.Youre allowed to do whatever you want. With my comment about the Lambo I was merely trying to point out the irony. You’re potentially worried about being overleveraged and you bought a highly (not always but usually) depreciable item (super expensive car)
As far as 35 percent equity, that’s reallt just a personal preference. If you’re leveraged at 25 percent you have very little if any “true” equity due to you cannot refinance anymore and selling with normal selling costs would eat most of that 25 percent.
As far you’re residential loans that’s not an issue as far as loans being called due or what not. However historically the real estate cycle lasts 18 years. We are in year 10 or 11. Which means in 5-7 years the cycle ends. Which corresponds to some of your commercial loans. Obviously we can’t predict this, I’m just saying that is historically the case.
Personally when I do commercial I will probably do 60 percent LTV. I am not as experienced as you or own as much (or a lambo) (I drive a Camry), so you are welcome to tell me to go pound sand. (Love that expression).
I am just saying what works for me and i probably wouldn’t have spent refinance money on a lambo. (I thought that’s what I remember being the case, I apologize if I’m wrong)
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Mike Dymski:
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.
yes what I see is risky was the post 2 weeks ago now
" thank you BP 0 to 15 units in 1 year)
Broken down Rookie or non experienced landlord Never owned a rental before.. Not in the real estate or finance business at all.
leverages the CA home to the hilt then goes to the mid west and pays cash for D class low end rentals.. so now what does this guy have no experience in the trench's 2,000 miles away from his investments.. and no equity in his personal residence anymore that would be tax free if he sold it.. and own what is arguably the most risky investment in the rental realm low end D class in the mid west.. that is see as reckless.. But on BP 195 folks were cheering him on like it was a great move and they all want to do the same.. that is your mind set right now.. a huge swath of the investing public with not enough experience or knowledge to know what is risky and what is not..
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes8y
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 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.25% equity really isn't a lot given the circumstances. Unless I'm going 30 year fixed around 60 is going to be my max, and typically closer to 50. On the commercial side, balloons come due in say 5 years, at which point you have not much over 25% equity due to the longer amortization periods and assuming the worst you have to qualify with a lower appraisal and thus higher LTV, plus higher rates etc. Not to mention the fact that depending on how bad things get, credit can dry up in the general sense, irrespective of the numbers on your particular deal.
Sweet spot for me is 5-10 years fully amortized fixed rate (7-10 is harder to find but I've seen it before). Hurts cash flow but avoids the lump sum problem, especially if you have a good W2 job where you can cover the higher payments if and when you run into higher vacancy, repairs etc.
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Mike Dymski:
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.
yes what I see is risky was the post 2 weeks ago now
" thank you BP 0 to 15 units in 1 year)
Broken down Rookie or non experienced landlord Never owned a rental before.. Not in the real estate or finance business at all.
leverages the CA home to the hilt then goes to the mid west and pays cash for D class low end rentals.. so now what does this guy have no experience in the trench's 2,000 miles away from his investments.. and no equity in his personal residence anymore that would be tax free if he sold it.. and own what is arguably the most risky investment in the rental realm low end D class in the mid west.. that is see as reckless.. But on BP 195 folks were cheering him on like it was a great move and they all want to do the same.. that is your mind set right now.. a huge swath of the investing public with not enough experience or knowledge to know what is risky and what is not..
Risky is making bad buys, mostly. A good property will be a lot less likely to put you in a position where your vacancy shoots up, or you have to tap into your reserves in the first place. Thus rendering leverage and other "risky" behavior less of a problem.
Buy for value, not price.
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes8y
Originally posted by @Jay Hinrichs:
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.
I think the environment has changed. The historical interval is 18 years. But it seems to me that over the last 20-30 years there's been a speculative frenzy around real estate far beyond anything seen for most of the 20th century. Volatility numbers seem to bear this out. People can't count on 50 year long careers with pensions anymore and real estate is their (perceived) ticket out of the mess their retirement plans are in.
- Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes8y
@Caleb Heimsoth I bought the car in cash and at a huge discount from a distraught seller. I analyze all my big "fun" purchases as much as my business ones. my mindset is always...can I sell this for the same or more later regardless. the cash to buy the lambo wasn't refi money, however more of my personal spend money was taken to fulfill the purchase than to other personal areas like vacations, eating out, etc.
and my daily is a workhorse civic too ;)
most of my rentals were bought using cashout refis from previous purchases so I understand if worse comes to worse and I sell at a 20-25% discount, I would basically be netting 0 in terms of buying/selling. however I would have gained all the cashflow over the couple years. again, this would be a worst case scenario.
My goal with the 7 year loans was to be aggressive in the first 1-3 years and just buy more if I Could. and as I got closer to maturity, really start hoarding cash for anything that might come up. - Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y
Originally posted by @David Zheng:
@Caleb Heimsoth I bought the car in cash and at a huge discount from a distraught seller. I analyze all my big "fun" purchases as much as my business ones. my mindset is always...can I sell this for the same or more later regardless. the cash to buy the lambo wasn't refi money, however more of my personal spend money was taken to fulfill the purchase than to other personal areas like vacations, eating out, etc.
and my daily is a workhorse civic too ;)
From what you just said I think you will be fine. I'm already paying down debt so my overall portfolio is at a 65 LTV by end of next year. That's not for everyone but that's just for me.
I predict a slowdown (could be small or big idk) somewhere in 2020, so I want to deleverage just a hair.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@David Zheng I know a fair amount about your business and mindset, just based on your posts over the years. You have that hustle to make it happen, which is a key factor in riding any down turn. The important thing is to keep the units rented, which should be possible in any market. It was honestly harder for me to find tenants in 2006-2007 than it was in 2010-2012. Bad economy results in more renters. You have a good market, so I don't see something "catastrophic" in your market (for example your entire economy doesn't rely on the auto industry).
Probably the biggest concern is something irrational, like the banks just calling your loans after the 7 year term (even if you are paying on time). That kind of stuff was happening in the last crash in some markets if the banks had too many outstanding loans and needed the cash. Things are different now though with newer banking liquidity standards, so I am not really sure the same thing would happen again. It sounds like you have several years left on the loans, so I would just stay on top of refinancing them as they get close to term. Don't wait until the last minute in case you need to hunt a little for the right lender.
You will be fine. If anything, think about how you could use a down market as a buying opportunity.
Post some pictures of your lambo!
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
@David Zheng I know a fair amount about your business and mindset, just based on your posts over the years. You have that hustle to make it happen, which is a key factor in riding any down turn. The important thing is to keep the units rented, which should be possible in any market. It was honestly harder for me to find tenants in 2006-2007 than it was in 2010-2012. Bad economy results in more renters. You have a good market, so I don't see something "catastrophic" in your market (for example your entire economy doesn't rely on the auto industry).
Probably the biggest concern is something irrational, like the banks just calling your loans after the 7 year term (even if you are paying on time). That kind of stuff was happening in the last crash in some markets if the banks had too many outstanding loans and needed the cash. Things are different now though with newer banking liquidity standards, so I am not really sure the same thing would happen again. It sounds like you have several years left on the loans, so I would just stay on top of refinancing them as they get close to term. Don't wait until the last minute in case you need to hunt a little for the right lender.
You will be fine. If anything, think about how you could use a down market as a buying opportunity.
Post some pictures of your lambo!
balloon loans were getting called left and right .. but like you not predicting that.. but balloons always have that risk ALWAYS...
when Rialto got 5 b of tarp funds they went hunting for little bank portfolios and loved picking up balloon payment notes then foreclosing on them.. it happened to two folks I know personally and they bought a little bank here in Oregon and did the same to some folks with MF .. it was a mess.. but again not predicting that at all.. however its not wise to also think the refi will always be there.. that is not prudent either.. so if your forced to sell 25% equity pretty much gets stripped in sales fee's and distressed forced sale pricing..
personally any short term debt I take on is my community bank that is solid and my banker of 25 years.. he rode through 08 with me and kept me afloat when others drowned on their debt.. but the larger banks I had credit facilities with they all got called and paying back 10 plus million in 20 months is not fun .. . LoL never again.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Hai Loc:
@David ZhengI saw an article today stating that July 2018 was the first time there was a month by month increase in foreclosures after 36 consecutive months of decreases. I wonder if this is a sign..
Logically, it would be impossible for foreclosures to keep decreasing month over month forever. At some point, it will hit a low point. It may stabilize or even go up and down a little. Even at that, going up or down is only part of the story. How much it goes up or down is also important. Major movement quickly can be a concern.
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
Originally posted by @David Zheng:
So theres a ton of talk about being over leveraged, a downturn or correction is coming, etc etc.
Well, I'm pretty leveraged. It was the only way to succeed without a 350k/year 9-5. brrr over and over.
So correct me if I'm wrong but what does anyone have to be scared of if the following conditions apply in a meltdown
1. youre locked into a 30 year conventional or 7 year commercial loan and the banks cannot re-appraise or call in full your loan as long as mortgages are being paid per the closing docs
2. your rents can take 25-35% cut and still break even on all mortages, taxes, and insurance
3. you live in a populated and buzzing area where demand has always been heavy and unless a bomb dropped on it (yay insurance) you shouldn't have trouble finding renters
4. downturn --> people lose jobs and homes or try to downsize and turn to renting (good thing).5. have solid tenants that have older co-signers (parents, guardians)
Am I missing something that the banks can still do to me even if I'm paying my debts on time?Sounds like you've got all the big points nailed. A couple more things I'd add in:
1. Funds are parked in C and B class assets, not A. People live above their means under favorable economic conditions, then scale back from A to B and B to C.
2. Protecting your equity position by investing in non-volatile assets and markets, so that when things go low, banks can look at you as a viable candidate when you go into land-grab mode.
- Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes8y
@Joe Splitrock
here you go cause you always manage to bring my spirits up! - Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes8y
@Jay Hinrichs, some ppl think we are in an 'everything bubble'. What are your thoughts on that?
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
Originally posted by @David Zheng:
So theres a ton of talk about being over leveraged, a downturn or correction is coming, etc etc.
Well, I'm pretty leveraged. It was the only way to succeed without a 350k/year 9-5. brrr over and over.
So correct me if I'm wrong but what does anyone have to be scared of if the following conditions apply in a meltdown
1. youre locked into a 30 year conventional or 7 year commercial loan and the banks cannot re-appraise or call in full your loan as long as mortgages are being paid per the closing docs
2. your rents can take 25-35% cut and still break even on all mortages, taxes, and insurance
3. you live in a populated and buzzing area where demand has always been heavy and unless a bomb dropped on it (yay insurance) you shouldn't have trouble finding renters
4. downturn --> people lose jobs and homes or try to downsize and turn to renting (good thing).5. have solid tenants that have older co-signers (parents, guardians)
Am I missing something that the banks can still do to me even if I'm paying my debts on time?Sounds like you've got all the big points nailed. A couple more things I'd add in:
1. Funds are parked in C and B class assets, not A. People live above their means under favorable economic conditions, then scale back from A to B and B to C.
2. Protecting your equity position by investing in non-volatile assets and markets, so that when things go low, banks can look at you as a viable candidate when you go into land-grab mode.
things get that bad banks are not lending to anyone :)
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @David Zheng:
@Joe Splitrock
here you go cause you always manage to bring my spirits up!cool looking car love the sound they make.. driving the Tesla is driving in silence.. And well small aircraft you need head sets lest you go deaf.. but its cool to be moving about at 200 mph.. and not worrying about getting a ticket.
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
@Jay Hinrichs you know better than I! Last crash I was still in my swaddlers :)
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
@Jay Hinrichs you know better than I! Last crash I was still in my swaddlers :)
ONe of the reasons the buying was so good was credit was frozen.. CASH is what you need in a true crash..
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
I'll cash in on the Lambo when the wheels fall off my civic, or if they throw it on the section 179 tax code ;) Nice wheels though. Get noticed more than you'd like in that thing? That's my worry
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
@Jay Hinrichs just so hard to sit on all that cash when you're making good money moving deals.... the taxes are insane. Don't know if things well get like 2009 again during my investment career but if it does, we're definitely hitting the fire sale hard
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Account Closed:
I'll cash in on the Lambo when the wheels fall off my civic, or if they throw it on the section 179 tax code ;) Nice wheels though. Get noticed more than you'd like in that thing? That's my worry
airplanes get you the 179.. when I bought mine in 04 .. I paid 440k for it and wrote off 420k year one.. and got it with 20k down.. kind of like buying an RV.. 20 year loan 5% interest payments were only 3k a month.. that kind of freedom and fun you simply cant put a price on..
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I'll cash in on the Lambo when the wheels fall off my civic, or if they throw it on the section 179 tax code ;) Nice wheels though. Get noticed more than you'd like in that thing? That's my worry
airplanes get you the 179.. when I bought mine in 04 .. I paid 440k for it and wrote off 420k year one.. and got it with 20k down.. kind of like buying an RV.. 20 year loan 5% interest payments were only 3k a month.. that kind of freedom and fun you simply cant put a price on..
I'll let you know when I get there. Just got an SUV this year, bought too early in the FY. Made more than I'd thought I would and am wishing I went bigger! lol
- Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes8y
@Account Closed you'd love the aftermarket exhaust on this thing. The other lambo owners call me "the mustang of the bulls" because of how aggressive it sounds
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @David Zheng:
@Account Closed
its a head turner for sure, but Ive always like the attention haha. This baby has gotten me more free valet, drinks, VIP nightclub tickets, exotic car parties, and connections than any expenses I've had with it. Plus its introduced me to a lot of well off people. have a couple surgeons who follow my real estate adventures now and want to be cash investors. this car was just as much about networking as it was driving for fun. ironically its not landed me any girlfriends LOL
@Jay Hinrichs you'd love the aftermarket exhaust on this thing. The other lambo owners call me "the mustang of the bulls" because of how aggressive it soundsthat's the difference about 8 out of 10 people wont get in a small airplane.. LOL even though it has a chute..
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
@Jay Hinrichs That jet would have got you two Lambos.
What @David Zheng doesn't know is that the first Lambo gets you the connections, the second one gets you the girlfriend. Halfway there!
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