48 Replies

Hi BP, This one is for investors that had purchased properties in last 2 years. How are you guys preparing for a possible market collapse?. For example in my area I've seen SFH the were sold in 2012-2013 for as low as 35k, now the same properties are been for sale for 160k/200k. With this inflation seems to me that there's not much room for this properties to increase their values and applying the BRRRR method. The market in my area is at the highest point since 2006. If the market crash again, those who are buying now will be in a pretty deel hole. Point is... BAD or GOOD time to invest in Real Estate RIGHT THIS MOMENT? Would like to know your opinions, thanks everyone!!!

@Jose Ortega   Any market has opportunity, and the markets are hyper-local, so it is hard to have a broad statement for every market.    Those 2012-2013 prices you mention are due to CRAZY mispricing due to huge amounts of fear that I doubt we ever see again.  Do I think prices will dip in many markets, sure...because interest rates are increasing and demand is coming on...this is nothing new, this is just the market cycle.

We are aggressively buying and here is why demographics for our market (greater Portland OR) are very favorable, it is the most affordable major city on the west coast...even still with massive amounts of people moving in vs. moving out.

The second reason is those interest rates...we are long-term buy and hold owners, so I WANT those lower rates, if I wait I might bet a lower price (or I might not) but I WILL pay higher rates or possibly not be able to finance at all.  Even during the last downturn where many assets tanked many markets still saw stable or growing rents.   People have been calling the next downturn every since the last one...and still waiting.  YOU CAN NOT TIME THE can only be defensive and have an investment strategy that is time neutral..i.e. I do not care what someone says my apartments are worth, I care that return the bring me which is driven by rents and management, not by asset price for something I do not intend to sell.

:)  Different answer for flippers/wholesalers etc I am sure.  When the down cycle comes a LOT of people operating on appreciation only or highly leveraged or in inventory business (flippers specifically) are going to go out with the tide...naked..

Updated about 2 years ago

I meant CAPACITY is coming on not demand. i.e. more being built

Even if there is a recession, it may not come from real estate. The lenders are not doing the same mistakes that they were in 2004-05. And although, everything might be affected due to the recession, it might not be as severe as the great recession, and may not affect real estate to that extent. 

How can you prepare for recession?  You buy smart, and you buy at a discount to achieve forced appreciation.  I know easier said than done in a bloated market, but that's the only way to do it.  Some people sit on their a$$ are waiting for the other shoe to drop.. They be waitin' forever... 

@Richard Sherman ...Thanks Richard, but do you see any room here with those prices for BRRRR? If I buy a property in this market do you think I'll have any equity in order to Refinance and do it again 6 months from now a year from now 2 years down the road? I know is hard to predict but just to have a better understanding. Thanks again!

How bad do you think a recession will be?

It took a generation for stock prices to recover during the Great Depression of the 1930s and half a generation during the Stagflation of the 1970s. Real estate suffered during the Great Depression (which was deflationary), but soared during the Stagflation (which was inflationary). We only know this by hindsight; no one saw it turning out this way in advance.

@Jose Ortega my philosophy is always be looking for GREAT deal. A great deal protects you from downturns to some degree. If  you can't find Great deals then build cash for a time when they are plenty.

I can tell you the entire US RE is having more homes for sale than buyers. Builders like Toll Brothers are not doing well. When the interest rate has been at sea level so long any increase in interest rates will have a jittering effect. People are so used to free money. The expectation in my neck of the woods is price will be flat and growth will be slower. May be sometime? The local market has tanked 10-12% last few months and there is no layoff in these high income neighborhoods. Homes all sell but instead of 10-18 offers sellers receive a handful only due to fear of the global economy deterioration. To ride out the unknown choppy water, one needs to have more equity in their investment or personal homes. These ARM mortgage with little down will precipitate default during refi. Prolonged unemployment will promise home loss.

As for flippers, if the homes do not have rapid appreciation the profit made if any is not worth the effort. Most must accept lower return which will eventually put many out of business.  

My question to those like you is how you weather 160K homes bought at this price if it tanks to $120K?  If you paid $50K you have more equity than recent arrivals.  Hope that helps,

Sam Shueh

Investors in any asset class will use “margin of safety” as an investment strategy. This is finding assets that are under levered, generating sustainable cash flows that are trading (or priced) at a discount to comparable assets. 

I use this same approach to buying real estate. Find an underpriced asset, don’t over leverage it, and seek sustainable cash flows. If the economic environment gets distressed significantly I can still service my debt and operating expenses, I’ll just have to sacrifice some cash profits during a downturn.

I think those who are properly leveraged, have good cash flow, and a large reserve is not worried about a recession. If it happens it happens.  Worrying about something you have no control is pointless.  Now if you are not in that position then there are things you can do. 

I think you need to look at your current portfolio and see which assets are performing and which ones are not.  Trim the assets to a position that will allow you to limit risk.  So for an example, you have 6  houses all leveraged to 80% ltv and collecting $150 a door. You need to do a risk assessment in a worst case scenario if all 6 houses were to vacate.  How will that affect you?  How long will it take to find a new tenant?  Do you have reserves to withstand the monthly lost?  These are things that you must know and prepare for.  

Same with if you own no properties and looking for your first deal.  Do you have reserves and monthly income to take care of an empty rental?  Again back to risk management.  

If a recession happens it will create many buying opportunities.  The largest transfer of wealth is during these times.  Like Warren Buffet says the market transfers money from the impatient to the patient.  I will add that holding power allows you to sit and wait. 

Originally posted by @Jose Ortega :
@Richard Sherman...Thanks Richard, but do you see any room here with those prices for BRRRR? If I buy a property in this market do you think I'll have any equity in order to Refinance and do it again 6 months from now a year from now 2 years down the road? I know is hard to predict but just to have a better understanding. Thanks again!

Brrr basically does not exist on the west coast unless you buy a lot and build from scratch.. cant buy the exisitng home cheap enough to have a no money into the deal refi.. or maybe it happens but its not a business model like it is in the mid west and deep south.. were you can pick up a home for 30k that with work will allow you to BRRR and have no money in it.. thats why the craze of west coast investor coming to your markets.

Originally posted by @Mike Dymski :
  1. Good locations
  2. Cash flow
  3. Add value
  4. Prudent debt
  5. Reserves

 good principals.. some markets were inventory is scarce there is still hot demand. I made an offer on a lot in Charleston yesterday.. thinking maybe with the slow down this fall i can snag it..  NOPE 3 offers and ask for highest and best..  so very regional 

and supply demand as always dictates..

@Jose Ortega Many parts of Florida got hit hard with a ton of foreclosures last downturn , the same thing in Vegas , Phoenix , parts of CA and other areas too . Now it’s not uncommon for certain areas to be up 300% or more from the lows like you’ve seen . Regarding the BRRRR method I don’t believe you should take future price appreciation into account. Also look at the fundamentals of the local economy . Is the area growing , more people moving in . New businesses coming in or expanding ? I think many posters make a good point when they say buying a great deal protects you . If properties in the area are say $150k but you can be all in $120k you are “protected” in a way from a 20% downside risk .

Buying properties 30%-50% discount of ARV . I just don't think the coming correction will be as severe as 2018. Even they are. I am still okay since all of my buy and hold profolio are free and clear and cash flowing. My flips projects will get hit though if value drop more than 30%. But worse case I can still have them rent it out since most of my flips are under 200k Mark. So I am investing like the market will crash tomorrow. Lol

@Jose Ortega

There is no recession proof. Still need to buy right. The economy is still flourishing. In our area they are back to building new apartment buildings. Remember the rental market did not really take a dip and the apartment market was less impacted then the SFH rental market.

At the end of the day, don't over leverage. Try to keep your LTV to less than 60%. We saw what can happen. Let's be smarter about this.

Good Luck.

Originally posted by @Kenneth Garrett :

@Jose Ortega

There is no recession proof. Still need to buy right. The economy is still flourishing. In our area they are back to building new apartment buildings. Remember the rental market did not really take a dip and the apartment market was less impacted then the SFH rental market.

At the end of the day, don't over leverage. Try to keep your LTV to less than 60%. We saw what can happen. Let's be smarter about this.

Good Luck.

 I am not one of those types that wants max leverage but in solid rentals why would it matter.. if in a down turn those rents kept coming in. I would think the issue would be if rents soften and go down or you have vacancies.. keep in mind not all apartments did well in the down turn.. in Vegas many lost apartment complex's same with Phx.. when vacancy went to 30 to 50%.. they lost them to the bank.

I know of one big apartment owner in Oregon who sold their prime Portland 3 and 4 caps chasing yield in vegas 100 million dollar roll up.

bought vegas in 06 with max debt and by 2010 he lost the entire portfolio to foreclosure.. in the meltdown nothing was immune.. although Portland ( and this is all very regional) that rental market was strong.. but today as we sit here it is weakening in Portland rents are coming down.. and those that have built new complexs are going to be stressed  for sure.. when rents get higher than owning which is kind of what has happened.. this thought that millennials don't want houses is just not correct.. they are not brain dead.. they know rent is a waste of money so when our rents in PDX get to 2500 to 3k or they can buy a brand new 400k home for the same price.. that's who is buying my new builds its that 30 to 40 year old new family.

@Jay Hinrichs

@Jose Ortega

Good valid points.  If we are trying to be careful in regards to what a recession will do to our investments leveraging at a reasonable level makes sense.

I agree many states took terrible hits whether, apartments, SFH or other investments. In the Midwest we were hard hit especially Michigan.

Rents for the most part as an average across the country in apartments, took the least of the hit. Where many SFH investors lost it all.

Let’s be smart investors.

@Jose Ortega Rule #1 buy below market value. If you’re not buying a discount it’s not a deal. And regarding your comment that was implying that houses can’t appreciate much more, just look at Canada, the UK and New Zealand housing markets. They have all far outpaced appreciation in the US over the last 20-30 years. When you look at their charts next to the US charts for median home price they make the 02-06 boom look flat. I don’t bet on appreciation, but I certainly think it’s possible that home prices in the US in general could still see much more appreciation. But instead I focus on cash flow. I try to buy 125k properties for 100k and achieve $500 in positive cash flow so that even if rents went down and expenses went up I could still produce cash flow.
Don’t spend 300 +grand on a house that puts 100-150 bucks in your pocket each month and then get on here patting your self on the back that you know it will appreciate and someday be worth over 400 grand because you live in Dallas / Phoenix/los Angeles etc.,. This is common sense but apparently it’s not so common being that everyday people get on here and post this stuff up . Not all homes appreciate not all homes can stay renting at 3000 a month not all homes can stay above water in a recession . Seems We have learned nothing as a nation since the RE crash of 2008 . Everyone thinks the bank will bail them out if it gets dicey ...but if the banks aren’t lending because they themselves are in hot water , then what ?
@Jose Ortega A good buddy of mine loaded up on a couple dozen properties before the last housing bubble. Each home was netting him only about $150/month. When the housing recession hit, most of his tenants bailed on him when their leases were up to move to much cheaper properties. He had to either lower his rent a few hundred a month to at least have someone paying something or let them sit vacant with no income. He slowly got foreclosed on almost all of them and learned a hard lesson. So for me, I like some equity in them in case I need to lower my rent a few hundred a month to compete with other buy and hold investors who bought their homes for a lot less than I did. Assume we have another recession and you might need to lower your rent $200-$300/month. If you can survive off that, you’re probably safe. If not, you’re gambling too much in this game.
Originally posted by @Jason Graves :
@Mike Dymski

Love this post!

Build reserves by opening lines of credit and cut expenses now... also sold stock to build cash to protect real estate in downturn

keep in mind Lines of credit whether helocs or tradition signature lines can and will be called and frozen in a bad economy.. so don't count on those  to bail you out.. unless you get them now and evergreen them right away.

@Jose Ortega It’s always a good time to buy real estate, and it’s always a good time to sell real estate. That’s a saying that’s used to convey the idea that each investor’s incentives are different. However, your underlying assumption is “is now a good time to buy real estate and capture maximum gains.” I would reply by saying nobody knows what the heck is going to happen in two weeks, let alone two years. We make calculated risks depending on the current trajectory of the fundamentals in the markets in which we operate. Take an all cash investor for example, every day is always a good time to buy real estate because of quality tax shelters and virtually zero risk. My counsel would be to not try and time the market. Make quality buys of good real estate in good locations and don’t leverage yourself to the point where you can’t sleep at night if rents turn around a bit.