How do todays investors protect against a market downturn?

Question

I was reading in one of Brandon Turners books about how he will only purchase a property for 20% less than what it’s worth in order to protect against a market crash.

My question is, will the market not drop less than 20% so you don’t go underwater with a property? What if it does drop below that threshold? Are there strategies to protect against that?

Thank you for your help!

Bob Prisco · Answer

@Damara Montaque  I have been doing business in the cleveland markets for many years.

Damara Montaque · Answer

@Bob Prisco how do you know how much it appraised for before making an offer to purchase? Do you just use comps to decide?

Bob Prisco · Answer

@ IMO who cares about up or down 10 - 20% , ( But I do always buy much lower then appraisal ) buy rentals. Rent still comes in and things always come back .

Good Luck

Damara Montaque · Answer

@Jacob Sampson wow. That’s a really good strategy thank you for the info

Dennis M. · Answer

Buy in c class areas and it won’t matter . In most companies The office management usually get the ax not the guy driving the delivery truck in a severe downturn . Buy at 60-70 cents on the dollar and don’t overleverage . You’ll do fine

Jacob Sampson · Answer

Fair point.  Let me first define as cash flow.  It is rent - 30% (for vacancy, maint, and capex) - PITI (mortgage payment) = long term true cash flow.  I shoot for $100 a door on a 15 year note.  So right off the bat I can lower rent by $100/month or 13% of an $800/month property.  I can even go further in order to keep the tenant because I can drop the vacancy percentage.  Finally I can go further by deferring much of my maintenance or capex.  I can essentially drop rent by 43% before I ever have to reach into my own pocket to cover the mortgage.

That will either keep the tenant or hopefully allow me to fill the property fairly quickly after the current tenant leaves.

If I have done a good job of managing my cash position then I should have a small pile of available cash to cover a vacant unit until it is re-rented.

Since I buy on 10-15 year notes I am buying down principal pretty quickly so I can utilize a line of credit to help cover the gap as well.

There is no perfect solution but if you buy right and manage your margins and debt load you have the greatest percentage chance of success.

Others will say you are even safer buying on a 30 year note since it drives up your cash flow and lowers your required monthly outgo.  I can't argue with that stance.  It is probably even safer.  I'm just a conservative guy who likes to buy down debt quickly.

Damara Montaque · Answer

@Curt Smith when you said “increase your net cash flow when you offer and finance” do you mean increasing it by purchasing properties for a lesser amount (assuming they accepted my low offer) or look for properties that would meet the 1.6/1.7 DSCR?

Thanks for your help

Damara Montaque · Answer

@Jacob Sampson that’s true, I wouldn’t care as much about my property value at that point as long as I’m cash flowing but I also heard that in a downturn rents can decline as well due to job loss. Any advice to combat this scenario?

Damara Montaque · Answer

@Mary K. That makes sense! Thank you

Curt Smith · Answer

I'll answer assuming the question is asking about buy and hold.   The short answer for flipping is similar but farther extreme;  buy even lower and cut a bunch off the expected sale price.  Study zillows price history for area flip sales for offering at a high price... price drops, then selling at 80% of original listing.  Given those finger prints do not assume that selling price is what you might get, take at least 20% off that last sale to be safe.   Given this tactic;  you'll not buy any flip deals.  LOL your cash is very safe sitting idle in an insured bank account.  ;(

Buy and hold similar but I would continue/ am continuing to buy but increase your net cash flow when you offer and finance.  IE $rent - $piti+hoa is MORE then you've typically bought at.   Lenders would measure this spread as DSCR.   If you hvae been buying at DSCR 1.5 then move to safer deals of 1.6 or 1.7.   The landlords that had wide margins, high DSCRs,  weathered the 2009-11 drop in rents fine.  You will too.

Buy quality, 3/2's nice area close to transportation in ok blue collar areas and you will always have demand from renters.  Be very very sure of area jobs.  Don't ever buy in weak jobs towns, only growing jobs.  Use indeed.com with radius set to 5mi anbd compare areas for best jobs being offered today as a predictor of being a strong area.  Look for new companies movin to the area.

Read my Bullet Proof Portfolio paper I've linked off my profile.