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Updated over 5 years ago on . Most recent reply

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Adi Jacob
  • New to Real Estate
  • Miami, FL
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How do i protect myself in case of another crash?

Adi Jacob
  • New to Real Estate
  • Miami, FL
Posted

Hey guys thanks in advance for anyone who reply's :)
My question is - if i buy a property lets say its worth today 100k with a 75k mortgage, and the market crashes next year, and the property is now worth 75k. Will i be able to refinance the mortgage since the value of my property has changed? Is that something that lenders will do? After all it is the banks interest that i will pay my mortgage..

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Nathan Gesner
  • Real Estate Broker
  • Cody, WY
41,407
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Nathan Gesner
  • Real Estate Broker
  • Cody, WY
ModeratorReplied

No, the bank does not adjust the price you owe based on the market. If you buy it for $100,000 then you pay $100,000. 

How do you protect yourself? Buy smart. This means you understand what constitutes a "good deal" and then only purchase property that meets that criteria.

If you purchase a property that cash-flows (according to the definition Brandon teaches), then a market down-turn won't matter to you. Let's say you buy a property for $100,000 and it's cash-flowing $200 a month. It won't matter if the market tanks and your property is only worth $50,000 because your expenses are still the same and your income is still the same, so you're going to continue cash-flowing $200 a month. The market value will eventually return. 

What if rent rates drop? First, a market crash would most likely result in more renters, not fewer, which means increased demand and rent rates would remain strong. But even if the rent market crashed hard and you have to drop the rent $200, you would still break even and just hang on until the market recovers.

A lot of people calculate cash flow incorrectly. They will take a $1,000 rental, subtract their $600 for the mortgage, and claim they are cash flowing $400 a month. They aren't setting aside for vacancy, maintenance, capex, and other projected expenses. When the market turns, those investors are more likely to experience a major vacancy, bad tenant, or a major repair that will break the bank and scare them into selling.

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