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..

@Adi Jacob It's called investing and what I understand most investments come with risk. No you can't refinance the property just because it drops in value. You lose 25% in equity but it doesn't change the payments. 

The bank still gets paid. 

Only way is to improve the property and hold for roughly 6 months. Then we can approach the bank to refinance. 

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.

I think you want to look at it a little differently @Adi Jacob .  You make money when you buy and efficiently improve.  You don't want to pay $100k for a property worth $100k as you don't make any money.  You want to pay less.  That gives you a buffer.  Typically an owner occupant will pay more for a home because the owner falls in love with it.  A good investor looks solely at the numbers to make a decision based on a target return.

Real estate investing is different than stock market investing.  In the stock market, if your investments drop 10% in value in a week, you just lost 10% - but only on paper.  The companies could then cancel their dividends and your income stream disappears.

Real estate isn't priced to the second like stocks, so you don't have that stress.  Prices will fluctuate, but you don't gain or lose until you sell, just like the stock market.  A big difference though is your tenants still pay rent or gets evicted if they don't pay.  I am sure you have heard the saying, "Location, location, location!"  That is your best factor to consider for future property values.  Markets will go up and down, but buying in a good location will give you a tail wind in any market.

Regarding a refi, you can always refi, but it might not be advantageous to you.  Buy with $25k down, $75k mortgage for a $100k property.  Property value drops 25% in your example.  Your equity is $0 and you owe $75k less payments.  Now, you want to refinance maybe to get a lower rate.  Your property appraises at $75k, so the same deal is $18,750 down, $56,250 mortgage; however, you don't have the down payment in equity.  You need to contribute that to the new mortgage to complete your refi to a lower appraised value for your lower rate.

Read both comments above...more than once.

Bottom line is to just buy right in the first place.  Don't buy a rental property that has poor cash flow (or worse negative), which you shouldn't be doing regardless of any "crash".

Property values go down and these events happen as a result:

1 - Mortgage payment stays the same, so if you bought right in the first place, you should still be cash flowing...and the "tenant" is still making your payments for you.

2 - Equity is lost, but equity isn't real anyway until you access it.  All this means is you need to recover it over time...and it should recover.  How long it takes to recover remains to be seen, but...See #1 above.

3 - More opportunities become reality.  If prices go down, then the next property you buy will cost less for the same property that you own now...and rents usually stay the same or go up, so...again,...

                                                  ...just buy right in the first place.

Thanks @Jaron Walling , @Nathan G. & @James Mc Ree !!  Alot of knowledge in your comments.

Real estate, and rental property investing especially, is a long term game. The most successful investors I know are ones that have been in this 10,15,20 years+ who truly understand how to react to an up market and a down market. These investors made it through the crash of 2008 because they bought right and were not over leveraged to a point where they couldn't cover their butts if something went wrong (and it did). Investing in anything comes with risk, real estate is not a get rich quick scheme and never will be and that's why it's best to hang on for the ride. We all know that a downturn will come one day, but that shouldn't stop you from taking a chance on buying property now. Like Joe said above, buy at the right price with the right strategy, and even when the market does turn you won't have to worry about having to hand your properties over to the bank or sell them off for peanuts.

@Adi Jacob getting a great deal hedges *almost* all risk in Real Estate. If you get a fantastic deal you can:

a) Afford to make improvements & repairs

b) Afford to hire a quality PM

c) Sell and not lose money 

d) Re-fi when the market is terrible

Buying correctly is the "One Thing" in real estate.

in buy and hold real estate you risk in a down turn is not devaluation of the asset per se. the only risk that presents is if you want to exit and you lose your downpayment money or have to stroke a check to exit.
the risk to a buy and hold investor is stoppage of cash flow..  so choosing the right cash flow property to begin with is key. and quality of asset usually will dictate consistent rental income.  dont get caught in the mind set that ALL rental properties perform in a crash.. the last crash saw huge vacancies in certain markets and many of those investors lost their properties becasue there was no rental income to support debt.. absolute safest way is to have limited debt or no debt.

This may come off as a naive comment, but in 15 years, I have never purchased a property where I felt there was a long-term risk of a 25% loss of value (particularly when adding value).  That would not even come close to passing my criteria.

Decent locations, add value, cash flow, prudent debt, and reserves.

Originally posted by @Mike Dymski :

This may come off as a naive comment, but in 15 years, I have never purchased a property where I felt there was a long-term risk of a 25% loss of value (particularly when adding value).  That would not even come close to passing my criteria.

Decent locations, add value, cash flow, prudent debt, and reserves.

I wish that was true for me..  I had loans on houses in Atlanta GA..  that in 06 ish were selling and apprasiing for 140 to 160 nice newer homes good areas.. by 2009 some of those the most i could get for them was 30 to 60k each.. now ATL has bounced back big time.. but it did happen. I barely lived through it.. Same with Ft. Meyers area.. now I was not lending there.. but I was buying homes that sold for as high as 200k in 06ish for 25 to 40k at the court house steps.. brand new never lived in..   Granted not MF..

In Phx i had clients that bought 4 plex's for 350k each in 04 05 ish. and by 2010 they were trading at or below 100k each..  it was very market specific.

PS not predicting another massive route like 08.. just saying what happened in my little world.  and how very regional real estate can be

 

@Adi Jacob

How to protect yourself? Responsible leverage. ie: don’t drink the “no money down!!” Cool aid that so many do. Generally used to sell books, magazines, and late night guru courses.

One thing that you can sometimes negotiate if the value of your property tanks, is to pay lower taxes, to petition to have the property reassessed.  People have done that successfully in CA, at least.

I wanted to share that the property I was managing was next to a university and the owner hated renting to students. But, when the market crashed even here in Silicon Valley, we lost 25% of our tenants overnight, other apartment complexes with lots of amenities had giant signs on the buildings that said no credit checks, free first month's rent, no security deposits - not kidding.

What we learned was that student tenants are crash-immune.  We also learned we could target law students, which we ended up loving and changed our tenant base to focus on them.

If there is any way you can buy property near a decent-sized college or university, especially one where the tenants go full-time (as in mommy and daddy pay the rent), you won't have to worry about a crash as far as your tenant base.

Undergrads are a pain.  If you can somehow target law or med students, they're great. And I suggest letting them sublet over the summer to summer intern students.  Or AirBnB the units over the summer.  If it's s decent sized college/university, they will have summer internships who will pay a premium for a short-term summer rental - that's cheaper than a hotel.

@Joe Villeneuve

To Joe's 3rd point, this is a sort of dollar cost averaging strategy in the stock world. But with the benefit of far greater future equity at a lower cost to the purchaser.

Just buy right. Ignore all thw fancy strategies that involve anything telling you otherwise... until you have enough experience to accept thise risks.

Originally posted by @Kris H. :

@Adi Jacob

How to protect yourself? Responsible leverage. ie: don’t drink the “no money down!!” Cool aid that so many do. Generally used to sell books, magazines, and late night guru courses.

 How many "No Money Down" strategies are you familiar with?  Specifically what are they?

What's with the fear mongering??

We all have real estate PTSD from 2008, because that is what we can remember - and somehow it became the narrative; it will carsh again, 30% down, that this is just how it is going to be in the future.

Of all people, investors should look at numbers and facts!!

When you look at the last 5 economic recessions, only 2008 had a significant negative impact on housing. No surprise it was a housing bubble / sub-prime (aka junk) mortgage crisis, that turned into an economic crisis. Look at the numbers: redicolous over supply, millions loans that a 4th grader could have predicted these people would not be able to pay, defaulting loans everywhere flooding the market with half off inventory. 

In every economic recession before home values were flat or even up. Why? Because when stocks tank money flees into hard assets, like gold and yes: real estate!

Will the market soften at some point? I sure hope so! It's way too fast right now, I feel like a stock broker, not like a real estate broker! If the market softens it only means it becomming more normal. So instead of 18 days on market we will be at 180 days on market and appreciation will go back to 2 or 3% a year and not like 8% we had in Milwaukee last year!

But I don't see that happen any time soon. Yes, an economic slow down will cool the housing market, so we will go from 110mph to 90mph, still way over speed limit! We don't have enough supply and there is no source of new supply, except if they start building highrise condos. 

The gap in cost of new construction and existing homes is way out of whack when you look at it in historic context. No surprise, in 2006 a new home was just 11% more than an existing home! Now we are at 35%. The historic average is somewhere in the low 20s. 

I am pretty certain that new construction, labor, material and land are not getting cheaper, so the only way the market can balance is by increasing existing home prices.

You should always invest, as IF there would be a 25% downturn around the corner: make sure you have equity, good cash flow and most important: don't fall behind on capex!! You don't want to get caught having to spend capex money when things get a little tighter. And if the downturn means prices go flat or minus 5%, you will be just fine.

"In god we trust, all others bring data":

 

@Will Gaston , RE-FI when the market is terrible? Why?

Originally posted by @Marcus Auerbach :

What's with the fear mongering??

We all have real estate PTSD from 2008, because that is what we can remember - and somehow it became the narrative; it will carsh again, 30% down, that this is just how it is going to be in the future.

Of all people, investors should look at numbers and facts!!

When you look at the last 5 economic recessions, only 2008 had a significant negative impact on housing. No surprise it was a housing bubble / sub-prime (aka junk) mortgage crisis, that turned into an economic crisis. Look at the numbers: redicolous over supply, millions loans that a 4th grader could have predicted these people would not be able to pay, defaulting loans everywhere flooding the market with half off inventory. 

In every economic recession before home values were flat or even up. Why? Because when stocks tank money flees into hard assets, like gold and yes: real estate!

Will the market soften at some point? I sure hope so! It's way too fast right now, I feel like a stock broker, not like a real estate broker! If the market softens it only means it becomming more normal. So instead of 18 days on market we will be at 180 days on market and appreciation will go back to 2 or 3% a year and not like 8% we had in Milwaukee last year!

But I don't see that happen any time soon. Yes, an economic slow down will cool the housing market, so we will go from 110mph to 90mph, still way over speed limit! We don't have enough supply and there is no source of new supply, except if they start building highrise condos. 

The gap in cost of new construction and existing homes is way out of whack when you look at it in historic context. No surprise, in 2006 a new home was just 11% more than an existing home! Now we are at 35%. The historic average is somewhere in the low 20s. 

I am pretty certain that new construction, labor, material and land are not getting cheaper, so the only way the market can balance is by increasing existing home prices.

You should always invest, as IF there would be a 25% downturn around the corner: make sure you have equity, good cash flow and most important: don't fall behind on capex!! You don't want to get caught having to spend capex money when things get a little tighter. And if the downturn means prices go flat or minus 5%, you will be just fine.

"In god we trust, all others bring data":

 

Wow!!!  The voice of reason.  Go figure.

 

1. Invest in markets where it's easy to keep the properties occupied because of high demand/population.
2. Refuse to over pay for rentals, no matter how good the cash flow is.
3. Keep at least 6 months reserves on hand at all times.

@Joe Villeneuve

After 5 years as a shift worker, unfortunately many. Great graph, and couldn’t agree more on the minimum equity statement. Folks leveraging to ~97% on their first 3 deals with zero experience self managing to “cashflow” $25/ month start day 1 with one foot through the motivated seller door. Bottom line is you DO need money to invest in real estate. Doesn’t need to be yours, but needs to be someone’s. Good grief up here we had 40yr 100% financing for a while in 2007... 6-8 years later we had 10x the rto programs start showing up. Didn’t take a sentient to see that coming.

@Adi Jacob I'd consider with where we are in the market cycle targeting areas that are more recession-proof! Look into markets that didn't take much of a hit in the last downturn. 

@Jay Hinrichs where do you find your homes in ATL? If you doing mind me asking.

Originally posted by @Demarcus Crump :

@Jay Hinrichs where do you find your homes in ATL? If you doing mind me asking.

 

not active in ATL at this time.. when I was it was first as a HML before the 08 melt down.. then post 2010 I set up a court house steps buying operation until the hedge funds came in and kicked all us little guys to the curb.. was able to buy about 50 homes though in about 14 months.