Price Target for adding to Properties if a Recession hits
Member since 2017 · 62 posts · 60 votes
Hey everyone.
Just wanted to gauge sentiment here. If you are planning on buying property on the next dip, what percentage decrease (I.E. 10%, 20% decrease from price highs) would you target for adding to more properties to your portfolio?
Also if a recession does come, do you think it’ll be significant (similar to 08 or worse) or a correction (<10%).
What’s your strategy?
Babek,
Your post reminds me of this saying "Life isn't about waiting for the storm to pass. It's about learning how to dance in the rain."
I have folks in my circle who stopped buying in 2013 and 2014 due to "prices are too high." Some are still waiting for the next recession. In the meantime, my multifamily biz partner and I have created $9M in equity from our acquisitions since 2013. This doesn't include the equity/money I have created with my flip and 1-4 unit partners. Yes, all deals are in the Bay Area.
Learn to play the game well while learn to minimize your risk. I've been "living" for over a decade without a W2. Our destiny is determined our decisions. We can't live life waiting. Our time on this earth is limited so keep exchanging it for money is not the best use of our time. You're more than welcome to keep waiting.
Just food for thought.
@Babek Sandhar, no one knows when a correction will come or how large it will be. Anyone who says they do is a liar or a con man. If you're waiting for the dip, you could be waiting for years.
@Jaysen Medhurst I agree we can be waiting for years. Being I want property in the Bay Area, I can see prices coming down significantly over the coming years.
When? I don’t know. But I’d expect 30%+ drop in property values. I don’t mind waiting for a dip but personally I would find it fiscally irresponsible to buy at these levels and in the midst of the longest bull market in US history.
I do think we are close though. 2/10 yield curve inversion, corporate bonds getting close to bottoming out, and Germany in a recession are just some key indicators that have been followed a US Recession in the coming years. I don’t think real estate prices begin to drop until we see a sell off in the stock market, which typically lags when GDP has actually begins to fall on a Q-Q basis.
Other areas? I’m not sure they’re hit as hard as places like Seattle, Bay Area, and New York
A 30% drop in property values in the Bay Area, @Babek Sandhar? I think that's highly unlikely unless everything goes pear-shaped all at once and in just the right ways. The simple supply and demand fundamentals of the area mean prices are unlikely to take a huge hit, even if the economy softens. Pair that with a diversified economy that's being driven red-hot by the concentration of technology companies...
I don't know much about Seattle, but NY is my back yard. There's been a ton of over supply that's languishing on the market and much more waiting to come on-line in the next few years. There could be a big hit here, especially Manhattan. That said, over the long term it's hard to argue that Manhattan real estate is a bad bet.
Babek,
Your post reminds me of this saying "Life isn't about waiting for the storm to pass. It's about learning how to dance in the rain."
I have folks in my circle who stopped buying in 2013 and 2014 due to "prices are too high." Some are still waiting for the next recession. In the meantime, my multifamily biz partner and I have created $9M in equity from our acquisitions since 2013. This doesn't include the equity/money I have created with my flip and 1-4 unit partners. Yes, all deals are in the Bay Area.
Learn to play the game well while learn to minimize your risk. I've been "living" for over a decade without a W2. Our destiny is determined our decisions. We can't live life waiting. Our time on this earth is limited so keep exchanging it for money is not the best use of our time. You're more than welcome to keep waiting.
Just food for thought.
@George Pauley I absolutely agree George! I’ve been very interested in some out of state properties in stable markets with good cash flow. Just not really sure what markets to look into out of state. I’ve looked in Nashville & Chicago. Planning on taking a few trips to a few states to scope out some properties. Any recommendations?!
@Minh Le that’s really awesome Minh! My goal is to do what you are doing! I was working with a flipper from early 2016-2018 and we did about 5-6 SFHs all in the East Bay in that time span (was an amazing experience).
Unfortunately for me, after 2010 there was no way I was going to be able to get approved for a loan for a property or better yet afford one (was in high school). However, over the last 8-10 years I’ve been able to save up a bit and build my credit. But buying property is such a big decision and because I am very adamant about buying one in the Bay Area (unless I find some good ones out of state), I would like to be sure I’m not buying at the top of a business cycle (again this is the longest bull market in US history dating back over 100 years).
Given affordability, tech evaluations of many companies who generate 0 or negative earnings (too reminiscent of the dot com era), and the disappearance of Chinese buyers (I made a post about this in another forum pondering how much influence they really had in major cities).
I don’t see the same fundamental drivers holding adrift a market that’s been one of the hottest in the world.
But Minh, if you’d like to connect for lunch one of these days I’d love to discuss real estate and markets over a lunch. I’m in San Jose too! Just let me know.
@Jaysen Medhurst my answer to explain my logic as to why prices can drop that much (I personally think it could go down further, but I’ll play it by ear) is much too complicated for this post, but I’ll try my best to keep it sweet and simple.
In a recession, a lot of these tech companies which have been heavily dependent on private funding and IPO/stock evaluations will lose value very very quickly. This changes the whole dynamic of the real estate market as a whole. Chinese buyers specifically had flooded the Bay Area markets from around 2012-2018 (when China began imposing capital controls limiting how much money Chinese citizens could invest abroad). Many people in Seattle, Vancouver, and Bay Area (amongst a few other major cities) would tell you that these were the cash buyers of million dollar houses and were the ones who created bidding wars on homes (5-15) bids per home. I haven’t followed Bay Area real estate as close since end of 2018, but I can say with almost absolute certainty that there are not even close to half as many bids per home, and probably only a fraction of cash buyers.
Yes, I think it is simple supply and demand economics, but we’re seeing a fundamental shift in demand, so it’s why I have to ask myself if this market is bound to cool off significantly.
I don't agree with your analysis for several reasons, @Babek Sandhar:
Then again, who knows what will cause the recession!
@Minh Le very well said!
I don't agree with your analysis for several reasons, @Babek Sandhar:
Then again, who knows what will cause the recession!
This is a great post Jaysen! I really agree with the points you've made and appreciate you responding.
I think the bigger issue is sustaining this type of job growth and expansion at the exponential growth we've seen. A lot of these companies have relied on Venture Capitalist funding and have failed to churn profits. Here's an article explaining this in more detail.
Here's an academic article done by UC Berkeley that explains the impact 2008 had on California and how long it took to get back to pre-recession levels. If you don't wish to read it, I'll summarize by saying unemployment was double digit for many years (2009-2012), and took a lot longer to get back to previous levels in 2008. Of the 8.3 million jobs that were lost, 15% of that was in California alone(that is quite astounding number).
Given what I am seeing in the tech industry, it seems that we are on course to repeat this course of action from 2000 where we lost 220,000 jobs or 2008 (where unemployment was double digits) which was less severe here but still saw massive cuts in jobs. For me personally, it's important to understand and be able to answer:
1. What is driving growth in these companies/industry?
2. Who is funding companies these startups?
3. Without funding are they able to operate? If so, for how long?
4. Are these companies profitable?
5. What is the cause and effect of losing liquidity on job cuts? i.e. people losing jobs, not being able to pay mortgages, easy access to credit, leveraging and debt taken out on refinance cashouts and HELOCs
Job growth is most definitely driven by tech and tech alone. However, being they are so reliant on private funding and IPOs for liquidity and have failed to turn profits, I cannot see how job growth can continue to grow at exponential rates without a heavy injection of liquidity into the Bay Area for many companies who seek funding (whether a new source of VC money comes or the FEDs implement heavy QE and flood the market with dollars, not very likely). I just cannot see how unemployment can stay at historical lows for a extended period of time.
I do agree with you that foreign buyers have no intentions of selling regardless of prices fluctuating up and down as this had more to do with securing assets and cash, outside of their home country (in this case China). If you PM me I will be more than happy to give you more detailed answer as global economics and US economics is something I've studied extensively over the last 6-8 years.
Here's an article, that will give you a better outlook at the housing market in Bay Area. Usually we've seen 10% declines (except for 2008 where we saw 27% decline in price) and I think this is where my opinion differs from the rest. I think it's possible we see something very similar if not worse than 2008 given a multitude of factors.
The reason I've decided to post more in this forum page is to at least give out an alternative perspective and flash these warning signs I see ahead. A combination of drying up funding, high stock evaluations, historically low interest rates, debt per households, etc. lead me to believe a sharp decline is upon us in this decade. I don't mind waiting, and if I'm wrong, well I guess I'll be looking elsewhere :(
I can't predict exactly when a recession will come, but I can say we are closer the top than we are to the bottom of an extended bull cycle that typically spurns economic growth and prosperity. I don't wish to offend anyone here, but simply sharing my opinion and I want to here everyone else's. I acknowledge I could be completely wrong, and I'm willing to bite the bullet. But I'd rather not put my savings and take a mortgage on something without doing my full due diligence first.
If you believe in your analysis, why not bet on it financially? You can still invest if you believe the market will crash. Short tech stocks, short Home Depot, make contrarian moves, etc. Being bearish isn't bad financially, but being bearish to the point where it leads to hand wringing or inaction can be. As Gordon Gecko said, "Bulls make money. Bears make money. Pigs get slaughtered."
Trying to time the market? Good luck.....if you're not buying RENTALS when the market is at the best it has been in years then I don't know what to tell you.
Prices will always be....too high for some people who want to wait for them to go down......some of those same people also say the prices aren't low enough yet.....and they still don't buy. Yes if you're flipping and/or buying hoping for appreciation then it makes sense to wait, perhaps.....however.....when prices do start going down.....do you think there will be less people or actually MORE people buying when prices go down...ergo....even MORE competition.
#AlwaysBeBuyingRentals
@Babek Sandhar
If you are in your 20s, you’ve got tremendous insight for your age. I had my head in the sand in my 20s, crushing it on my W2 job, earning accolades and occasional promotions (pay increases fractionally followed said accolades). We built our first home in 2005 at the height of the market (housing is an investment is all we were sold on). Looking back, it was a lot of herd mentality and missed opportunities real estate wise.
Here is my opinion for what it is worth: buying SFHs is very timing sensitive. But buying multi family, which is priced on the amount of income it generates, and not, as in SFHs what the economy is doing or what the house down the street sold for. And, when people lose their jobs, or get their hours cut, they down size. They move out of their house and into an apartment.
Soooo, the more I learn, the more I believe that a good solid MF complex, in a good strong city where the economy is diverse and strong, will be able to weather most storms, as long as you are not over leveraged.
If you believe in your analysis, why not bet on it financially? You can still invest if you believe the market will crash. Short tech stocks, short Home Depot, make contrarian moves, etc. Being bearish isn't bad financially, but being bearish to the point where it leads to hand wringing or inaction can be. As Gordon Gecko said, "Bulls make money. Bears make money. Pigs get slaughtered."
I believe having cash in the bank and safe haven assets (fully owned property, cash-flow property in stable markets, gold, silver, etc.) and waiting for prices to come down is a huge bet financially (opportunity cost). Warren Buffett is holding record amounts of cash. Sometimes doing nothing is the best option, as how I feel now (although places like Memphis and Chicago have been growing on me). Betting on a strong dollar, lower asset prices, a deflationary environment, and locking in cheap assets with low interest rates by having cash on hand, good credit, and good relationships with lenders now is what I'm going to bank on.
I know a lot of people don't agree with this sentiment, but each to their own and I respect all of your opinions.
We are all in different situations financially so it's appropriate that everyone have different strategies. My goal is to simply buy as many assets in major cities (specifically the Bay Area) and as much farmland as I can acquire (btw can someone refer to me any specialists of farmland/ranches?). I believe I missed my window of opportunity in this last cycle to buy property in the Bay Area. I was dead broke then and had 0 knowledge of real estate (now I have about 2-3% the knowledge which is a start), so I will wait for the next cycle bottoming.
But in essence, the answer for why I won't short this market is simple. Tech stocks and the Bay Area has been the hottest market in the world over the last decade (it's a bubble whether we admit it or not). Bubbles and irrational markets act exactly as that, irrational. This could go on much longer than me and you could ever imagine.
I can't predict the ending and I won't be surprised at all when it goes much higher in the foreseeable future. It would be stupid on my part to bet against a market that could very likely go extremely parabolic regardless of how I feel (no emotional investing for me).
Michael Burry actually talked about this exact problem in the stock market today and compared it to CDOs in 2008. He did predict the housing crash which essentially is something no one saw coming, so he must have some sort of credibility.
If you look at the US stock market before every crash, it tends to move parabolically and irrationally towards the end of the cycle (Probably the crazy move in stocks we'll see over the next few years) before a cataclysmic ending. Here's the Federal Reserve Chart so you can see exactly what I'm talking about (gray areas are "official" recessionary periods).
It's really cool to read everyone's sentiment and thanks to everyone for sharing your opinion. I simply share my opinion because it's very strong and I don't think it's said enough on this forum. I've learned so much from reading discussions and listening to podcasts on biggerpockets. By being challenged and helped by many of you here, I am simply returning the favor by challenging those to think about something they probably haven't given much thought about. It's all food for thought at the end of the day and a fresh perspective.
Here is my opinion for what it is worth: buying SFHs is very timing sensitive. But buying multi family, which is priced on the amount of income it generates, and not, as in SFHs what the economy is doing or what the house down the street sold for. And, when people lose their jobs, or get their hours cut, they down size. They move out of their house and into an apartment.
Soooo, the more I learn, the more I believe that a good solid MF complex, in a good strong city where the economy is diverse and strong, will be able to weather most storms, as long as you are not over leveraged.
I couldn't agree more. I would love to own a multi-unit, just not sure what/where I should be looking at or where to start if I was too. I've just taught myself how to make institutional grade proformas for multi units on excel, but now it's really trying to understand all the metrics and how to apply them properly. I will PM you.
@Babek Sandhar
If you are in your 20s, you’ve got tremendous insight for your age. I had my head in the sand in my 20s, crushing it on my W2 job, earning accolades and occasional promotions (pay increases fractionally followed said accolades). We built our first home in 2005 at the height of the market (housing is an investment is all we were sold on). Looking back, it was a lot of herd mentality and missed opportunities real estate wise.
Thanks Jai,
Mind sharing what you wish you did in hindsight for some of us that weren't investing during that time period? Would be cool for you to share your story with everyone if you don't mind.
@Babek Sandhar
Summary: Bought and rented/sold a few SFHs over 15 years, none of which appreciated enough to make capital gains, but they cash flowed enough that we could pay the mortgage.
Positive lesson : Cash flow (and a dual income family) allowed us to not lose our shirt even in a struggling economy. Being conservative, we were never over leveraged.
Negative lesson : Didn’t buy the homes as investments, but bought out of necessity due to moves, therefore didn’t perform underwriting! Didn’t have BiggerPockets to learn from.
When older folks here in the forums summarize and simply say ‘buy for cash flow no matter the economic cycle’, that is the absolute best takeaway from their experiences.
Those that buy for appreciation, I’d say, look at any stock that’s desirable today. TSLA is around $800, was $180 a few months ago. Did you buy when it was $180? Did you then sell now that it has appreciated to $800? No? Why not?
If I had a nickel for every person I heard say, "I'm waiting for the dip..."
It's bound to happen eventually, so build it into your strategy. Like KT said, don't be a pig.
@Jai Reddy
This is very insightful, thanks for sharing this with everyone.
Hey everyone.
Just wanted to gauge sentiment here. If you are planning on buying property on the next dip, what percentage decrease (I.E. 10%, 20% decrease from price highs) would you target for adding to more properties to your portfolio?
Also if a recession does come, do you think it’ll be significant (similar to 08 or worse) or a correction (<10%).
What’s your strategy?
Hard to say what my target would be, there is a lot to consider. I think I'm going to build up some capital and buy more properties as I've been doing. Now the good thing is we were smart enough to get into real estate before the next recession so we should see a benefit from our investments.
Hey everyone.
Just wanted to gauge sentiment here. If you are planning on buying property on the next dip, what percentage decrease (I.E. 10%, 20% decrease from price highs) would you target for adding to more properties to your portfolio?
Also if a recession does come, do you think it’ll be significant (similar to 08 or worse) or a correction (<10%).
What’s your strategy?
Hard to say what my target would be, there is a lot to consider. I think I'm going to build up some capital and buy more properties as I've been doing. Now the good thing is we were smart enough to get into real estate before the next recession so we should see a benefit from our investments.
Agreed Nick, I think when we get there, it will be best to play it by ear. I would like to see how Fed's react with their policies, any new regulations that could affect liquidity flow, interest rates, etc. I acknowledge this correction could be minor and I'm ready to play both sides. Managing risk as many of these investors say is key to longevity. If you're looking for a good book to read to learn how to time bottoms in recessionary periods
2 Books I would recommend "The Anatomy of the Bear" by Russell Napier and "Principles for Navigating Big Debt Crises" by Ray Dalio (This is a free PDF, I will send it to you if you request through a PM. Their work is phenomenal and decades of research condensed into each respective book.
Good luck on your endeavours.