You have 6 months to liquidate your assets
I’ve been doing a lot of research lately and I wanted to share with you guys what I have found about the correlation between unemployment, delinquencies and housing prices. During the 2008 housing crisis the housing market bottomed about 2 years after the peak in delinquencies. Note that delinquencies are very much so correlated with unemployment rates (see graph on link below). Unemployment is already about twice the peak in 2008 so it is very likely that delinquencies will follow, which will lead to increased supply of housing.
See data here, gathered by stanford researches: https://web.stanford.edu/~pavelkr/jmp_slides.pdf
Conclusion: You have about 6 months to sell off your assets until the market will be flooded with fire sales and forclosures.
Very smart to use starker exchange
I used OPM (other people's money) to buy the portfolio but in form of equity rather than debt. I saw an opportunity to acquire houses while offering 10%+ returns to investors plus appreciation, but I raise those funding promising a 3-5 year holding period. Things went up, they wanted to cash out (as I promised them) and I wanted to hold, so I sold other assets and bought them out in about 2015. (If I had used the BRRR method, I would have used the extra income to pay down debt. That is just my way after losing big $ in many prior downturns. I am much more conservative now.)
The tax question is much harder, and one I am still not sure I have right. If it were simply trading out of weaker assets in favor of better ones, I would definitely use 1031. I tend to buy "special situation" off market deals which makes identification within the 1031 time frames tricky even in good times.
But here I am making a market bet - trying to sell when asset prices are high, and have cash for when they are lower. So if I just trade into different assets, I have to bet either that I have the downturn timing exactly right (unlikely) or chose a different market that I think would perform differently (I never give up my local advantage) or maybe trade into a different asset class. All of those options stink, at least for me. So my plan now is to bite the bullet and pay a big tax bill. Ouch. But because I am pretty conservative on the rental front (I save my crazy risk taking for entitlement deals), and for other reasons I won't get into here, I instruct my CPA to take minimal depreciation. So yes, the tax bill will hurt, but my depreciation recapture will be relatively minimal as a % of overall tax hit.
I hope you find some of that useful or at least interesting.
Also, some of my assets are held in self-directed retirement vehicle, so no taxes due on those.
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Originally posted by @Account Closed:Steve,
Just curious, did you ever consider 1031 Exchanging to eliminate Capital Gains' Taxes and Taxes on Recaptured Depreciation taxed at 25%?
If not why not? If so, why not? I am sure readers would like to share your reasoning.
For me, these were just single family rentals sold in otherwise pretty low income years. Also, the market they were in that I know best was frothy in my opinion.
So, rather than force myself to identify and buy again under deadlines at an elevated place in the cycle, I paid the roughly $12k/yr and resumed my nap schedule. Hunting takes work. YMMV.
@Tony Blasioli Found some information that I hope will be helpful to you. There's a lot of guidance and resources in the article. Wish you the best. Stay positive!
Originally posted by @Matt M.:@Thor Sveinbjoernsson
There are a ton of people on unemployment.. making $600/week more than usual. I personally don’t think the foreclosures are going to be that bad.
If these people are smart, they will take the extra $2400/month and put it away.
Most people are not that smart. :-)
Originally posted by @James Hamling:Originally posted by @Michael LeClerc:What do you guys think about if this foreclosure crisis does happen that there will be hedge funds waiting to scoop up these properties like they did in 2007-11 and turn more of Americans into permanent renters. In 2007 homeownership percentages as at 70%. Pretty soon we’ll be like Europe where homeownership rates are much lower.
In the property management world, immediately pre-covid the #1 thing we were talking about as an industry was the sociological flip that was going on with traditional ownership/renter numbers. What had been 60/40, was forecasted and in motion flipping to 40/60. Lot's was said in way of reasoning and so on, but we were seeing that shift progress on pace. There is no need for a foreclosure crisis, this was happening with fund-level investors growing at a huge clip all the way up to covid, if anything covid may have slowed this. Fun research, look up Jared Kushner's primary business because you're detailing it.
Kushner... Urgh.
Originally posted by @Vince Ivanov:People keep saying that this time it’s different because people have a lot more equity in their houses. This is not entirely true. Many people who bought in 2019 and early 2020 are potentially under water.
I agree. There's a lot of buyers who now realize that they'll be in trouble if there is a correction. I am seeing a lot of listings where those people are now trying to sell at just above what they paid 1-2 years ago to avoid losing money.
Adrianne Epps, thank you very much.
Hold for cash flow, don't get over-leveraged, have reserves and you should be fine. Those slim deals that people were doing pre-covid are not going to work going forward. That is a lesson to be conservative, this is a build wealth slowly game. Plan for the long run and get into a deal with multiple exit strategies. And remember that equity is like your get out of jail free card. If you don't have equity you have no way to exit a deal and not lose your shirt. But if you are conservative and underwrite with sound principles you won't have to liquidate and can cash flow through the worst of times, and maybe even experience a bump in net income if rents increase like they did through the last recession.
Originally posted by @Aaron Mazzrillo:And for the record, if you search this site, you'll find lots of economic gurus preaching market crashes in 2017, 2018, 2019 and here we are in 2020.. nothing changes on this site. Same BS, different day and different crop of newbs with all the right answers.
I agree. My dad seems to follow this mentality. At some point they are correct but it is just by chance. Like the old saying goes, even a clock is correct twice A-day. BTW Arron, I enjoyed the 1 on 1 you did a while back and I agree about reading and investing in your self with books first.
Originally posted by @Gabriel F.:Originally posted by @Aaron Mazzrillo:And for the record, if you search this site, you'll find lots of economic gurus preaching market crashes in 2017, 2018, 2019 and here we are in 2020.. nothing changes on this site. Same BS, different day and different crop of newbs with all the right answers.
I agree. My dad seems to follow this mentality. At some point they are correct but it is just by chance. Like the old saying goes, even a clock is correct twice A-day. BTW Arron, I enjoyed the 1 on 1 you did a while back and I agree about reading and investing in your self with books first.
I appreciate the kinds words. Much success to you!
Gabriel,
A little jaded perhaps ... "you'll find lots of economic gurus preaching market crashes in 2017, 2018, 2019 and here we are in 2020.. nothing changes on this site. Same BS, different day and different crop of newbs with all the right answers".
Is this any different than the Sports world debating who will win the Super Bowl or World Cup?
But you make a good point. I feel the same way about Gold and Currency Bugs, everything is going to hell in a hand basket and the ONLY intelligent remedy is to buy ... GOLD and they hold Gold.
Still, it is interesting to be able to read what others are experiencing across the country.
Even with moratoriums on Evictions extended until July 25 in Miami Date, 700 Evictions were filed. A backlog of Auctionable houses is growing.
There are so many economic dynamics yet to be determined because of so many moving parts who can say he/she/it has a clear picture of the immediate future, e.g. 6 - 12 months from now.
I believe real estate will remain a top investment asset but available cheaper and with better terms, Subject Tos, Lease Options, Contract For Deed etc.
Lenders, as always, are turning chicken and tightening the qualifications for a loan.
To me it is encouraging many homeowners can defer a few payments to the back end of the loan rather than forfeit the home.
This should have been available during the last real estate crash and a lot of people would still be in their homes with fewer Board Ups.
I think we are in the greatest country in the world with the greatest real estate system in the world.
Truer, sharks are everywhere to take the money of the naive but once you learn how to navigate around them it is clear sailing.
Originally posted by @Patrick Snyder:One of my favorite things to do lately is peruse these forums where people argue about all the things that could happen, even though nobody knows. It's really like watching a reality tv show, which is why I get my popcorn ready each night to browse the ridiculousness. Whatever you all do, please don't stop this back and forth, because someone is going to be right, inevitably, and he or she will be able to sell seminar on 'Predicting Real Estate Markets in the 21st Century', and I want the first copy.
The next great "How to Get Rich Through Real Estate" book coming at you! I hope it includes stories of fighting through adversity and nearly losing it all just to come out on top as a millionaire......all while being 97% leveraged....
All of that said, I know my local market is in need of a reboot.... People are paying astronomical prices for meh properties due to a lack of housing. I am hoping, see I said hoping not forecasting, that a consequence of all of this will be a permanent shift to more work at home careers which will lessen the need for commercial property and hopefully open up space for further residential development.
Chris,
You must be psychic. I just completed my book, it's 435 pages, entitled.
"Predicting Real Estate Markets in the 21st Century"
Just kidding and I agree this forum is entertaining.
I had hoped this forum would be based based on more "Actual Experiences" than pontificating and conjecture.
But, there is a 1st Amendment and everyone has his/her right to present a point.
Everyone wants to be the one that "predicted" the recession. I agree, we will see some corrections. However, those corrections will be a lot more visible in the metropolis areas such as New York and Los Angeles.
A contact I have at auction.com who talks regularly with Fannie Mae etc.believes the golf ball will pass through the garden hose won't be until early 2021.
Right now Fannie Mae and other U.S. Government Agencies have yet to experience an onslaught of Foreclosures.
Originally posted by @Thor Sveinbjoernsson:Originally posted by @James Hamling:Are you trying to see how many lies and incorrect things you can say? No, not even close, at all, this is basic numbers and you call yourself an accountant?
Nationally we have not only already hit but exceeded full recovery, years ago buddy. Seriously, stop pulling random BS statements out of thin air, really.
Again, please stop with the personal attacks to anyone to does not agree with every word you write. Also please stop generalizing. There are plenty of examples of people buying at the top still being under water. See examples below that took 2 minutes to find:
1. Sold for 2.3 million in 2007 - now on sale for 2.2 mill. You invest that at 8% avg return for 12 years and you have 5.5 million today. Thats 3.2 million dollar loss - https://www.zillow.com/homedetails/35-Muscogee-Ave-NW-Atlanta-GA-30305/35901424_zpid/
2. Sold for 3 million in 2008 - now on sale for 2.8 mill. you invest that at 8% avg return for 12 years and you have 7.5 million today. Thats a 4.5 million dollar loss - https://www.zillow.com/homedetails/1220-W-Wesley-Rd-NW-Atlanta-GA-30327/35917213_zpid/3. Sold for 2.6 million in 2008 - now for sale for 2.8 million. you invest that at 8% avg return for 12 years and you have 6.5 million today. Thats a 3.9 million dollar loss - https://www.zillow.com/homedetails/2969-Andrews-Dr-NW-Atlanta-GA-30305/82626237_zpid/
I do realize there are plenty of examples of houses being valued more now than at the top in 2008 but I am reminding people to be careful.
You do realize that most people buy houses with loans right? Your math is fuzzy because you are acting like they paid for those million dollar homes in cash at the top and then sold at a loss later on. So yea they could have invested that $ at an 8% return for 12 years. But it would have only been whatever $ they put down... Not the full value the house sold for.
@Thor Sveinbjoernsson
I can't predict the future. But I would think that lenders will be under pressure to work through default issues and they are ahead of the game relative to 2008. There is plenty of real liquidity in the market to buy opportunities as they arise so I'm not seeing a tidal wave of defaults that lead to a huge correction. Prices might dip or hold steady for a few years.
Election this year is a big factor. The Fed has and will infuse more money to the market to avoid any crashes in the near future. Inflation, however, is inevitable.
I doubt that there will be another housing crash, simply because of the fact that there's no way that fate would be so good to me again after I purchased a bunch of rentals during the credit crisis that have appreciated over 5x, have no debt on them, and cash flow like crazy today.
Never say never. But if another housing crash happens, I'll be the most grateful and blessed person on this planet IMO
Update.
My contact at auction.com says Pre-Foreclosures, Foreclosures and REOs won't really be measurable unto the beginning of 2021.
Moratoriums, and possible continuation of moratoriums, have delayed delinquencies that are piling up and will likely create a logjam.
For many of $600 a week Fed Unemployment recipients, what will they do if they have NO JOB when the Fed $600 weekly payments stops at the end of July???
Personally, I am using software to cultivate Leads that are:
1. 95%+ LTV
2. Pre-Foreclosure
3. Out-Of-City Absentee Owner
4. Out-Of-State- Absentee Owner
Thus far I have hundreds of Leads and I believe the list will grow.
Can you describe your software approach to zero in on this criteria?
Steve,
After kissing a lot of frogs I have come-up with a software that does almost every aspect of what I want.
I paid $1,000 for it.
Still interested?
Tom