What do investors do during recessions?

BRRRR - Buy, Rehab, Rent, Refinance, Repeat

What do investors do during recessions?

Member since 2022 · 11 posts · 1 vote

Home prices dropped in 2008 and I heard a story from a colleague of mine that they lost their house because their home was not enough collateral for the loan. So my question to all my BRRR and 2008-era investors - how did you exit or hang on to your properties? You have to leverage a lot of real estate so what happens when your home prices drop under the borrowed amount?

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

Most of us retire to Florida and play shuffleboard :)

Anyway, yes you asked two different questions. The one in your title, most savvy ones just wait around for those on the edges to start falling off, and then picking up their properties at fire sale prices as mush as possible/practical. As for value vs. leverage, that only matters if you can't make your note. If you can't, then you're one of the edge people above that sells your investment at fire sale prices.

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John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
3y
The current value of a property really only matters if it's being purchased or sold. Most of the people that walked away from their "upside down" loans on homes in the GFC would have been fine if they just kept paying the mortgage and held the property. There were a lot of adjustable rate mortgages back then, also a lot of loans that exceeded the retail value of the property. Due to a lot of changes in the mortgage/banking industry as a result of that mess, it's not likely there's going to be a repeat.
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Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
You build up as much cash as possible
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Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
3y
@Enoch Li you're asking two different questions:
1) What do investors do during recessions
2) What happens when your home price drops below the borrower amount
1 - savvy investors will be more conservative in their underwriting guidelines. Save as much cash as possible. Be ready to take advantage of discounted properties
2 - It depends on the condition of the property and your personal financial situation. Is the property rented and cashflowing? Then, keep it and wait for the market to go back up. Is the property vacant and in need of repairs? It may make sense to have the lender foreclose on the property. Be very careful with what this will do to your credit and put future deals at risk.
This recession is nothing like the 2007-2008 crisis. A lot of properties have built of equity (hopefully)
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
3y
Most of us retire to Florida and play shuffleboard :)

Anyway, yes you asked two different questions. The one in your title, most savvy ones just wait around for those on the edges to start falling off, and then picking up their properties at fire sale prices as mush as possible/practical. As for value vs. leverage, that only matters if you can't make your note. If you can't, then you're one of the edge people above that sells your investment at fire sale prices.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
3y
Those 'edge people' would consider Strategic Default, a term used in the GR when homeowners walked away a left their failed investment to the lender. Even those of us buy-and-hold types had a tough time of it wrt financing. Long-term investors maintained good liquidity and rode out the storm. A lot of people went under. You can find posts about it on BP, from 2008-2012. An example from 2011: Upside down in rental, what to do?
Good luck.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
3y
Most of us don't buy properties that have high risk of huge value declines or extended vacancy periods. Property values in my market went down 5-10% max in the last recession and, more importantly, occupancy was high in the right locations. Buy in decent locations with prudent debt, reserves, and cash flow and sleep well at night.
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Bob S.
Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
3y
Quote from @Enoch Li:

Home prices dropped in 2008 and I heard a story from a colleague of mine that they lost their house because their home was not enough collateral for the loan. So my question to all my BRRR and 2008-era investors - how did you exit or hang on to your properties? You have to leverage a lot of real estate so what happens when your home prices drop under the borrowed amount?

Buy more , cash,
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Enoch Li
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Member since 2022 · 11 posts · 1 vote
3y
Quote from @Jon Kelly:

@Enoch Li you're asking two different questions:
1) What do investors do during recessions
2) What happens when your home price drops below the borrower amount
1 - savvy investors will be more conservative in their underwriting guidelines. Save as much cash as possible. Be ready to take advantage of discounted properties
2 - It depends on the condition of the property and your personal financial situation. Is the property rented and cashflowing? Then, keep it and wait for the market to go back up. Is the property vacant and in need of repairs? It may make sense to have the lender foreclose on the property. Be very careful with what this will do to your credit and put future deals at risk.
This recession is nothing like the 2007-2008 crisis. A lot of properties have built of equity (hopefully)
Thanks for the insight! In the title, I meant to ask what investors who own homes during recessions do if they have an upside down loan. Either way, it won't affect me as long as the property's cash flowing correct? Because the story I heard (albeit he did preface with the fact that it was a predatory loan) was that the parents made the payments on time but still ended up needing to sell it purely because the lender asked them to. Is that a foreclosure or something different?
0 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
It has to depend on the location and the property type and class. You’ll need to ask long time landlords in your market that rent out the same type of properties.
During the Great Recession I heard that multifamily landlords got hurt bad in vegas. But as an owner of SFR in Vegas, one of the hardest hit areas in the country, I was raising rents 10% - 15% per year.
It really depends on your tenant base. Mine was home owning family’s that had zero desire to live in an apartment. Selling or losing their home and moving in to an equivalent rental was a no brainer. Their life barely changed.
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Chris John
Member since 2020 · 671 posts · 937 votes
3y
@Enoch Li
I believe that you're referring to a callable loan, but I could definitely be wrong. I definitely don't know much about it, but in theory, a bank can call your loan and say that they'd like to be paid back in full. If you have equity, you can sell or refinance to pay them back. If the property is "upside down" because of declines in the market, you would need to refinance or sell for what you can get and then make the difference up in cash.
Having said this, I don't know much about callable loans in terms of which loans are callable, under what circumstances loans can be called, why a lender would call a loan that's "upside down", why a lender would call a loan that is current on payments, etc.
Sorry if this isn't what you were getting at!
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
3y
Some get crushed.
Some make money.
Some sit still.
Some hunt and buy good deals.
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Enoch Li
OP
Member since 2022 · 11 posts · 1 vote
3y
Quote from @Chris John:

@Enoch Li
I believe that you're referring to a callable loan, but I could definitely be wrong. I definitely don't know much about it, but in theory, a bank can call your loan and say that they'd like to be paid back in full. If you have equity, you can sell or refinance to pay them back. If the property is "upside down" because of declines in the market, you would need to refinance or sell for what you can get and then make the difference up in cash.
Having said this, I don't know much about callable loans in terms of which loans are callable, under what circumstances loans can be called, why a lender would call a loan that's "upside down", why a lender would call a loan that is current on payments, etc.
Sorry if this isn't what you were getting at!
Interesting! I think this might be what I was referring to. Do you know if all loans are callable or is it a specific product?
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Chris John
Member since 2020 · 671 posts · 937 votes
3y
@Enoch Li
I'm definitely anything but an expert, but I think it's a specific loan type. Sorry, I've only heard of them, but have no experience with them.
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
3y
Home prices dropping only affects those that sell. Simply dont sell, keep on renting it. Then youll be good
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Sam Bhattacharya
Rental Property Investor · Damascus, MD · Member since 2018 · 50 posts · 31 votes
3y
Quote from @Scott Mac:

Some get crushed.
Some make money.
Some sit still.
Some hunt and buy good deals.

How exactly do investors get “crushed”when house prices go down? I wasn’t investing in 2008, but I did own a primary residence.

The value of the house went below the mortgage balance for a number of years. I just kept making the mortgage payment every month as usual. Nothing changed.
1 Reply
Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
3y
Quote from @Enoch Li:

Quote from @Jon Kelly:

@Enoch Li you're asking two different questions:
1) What do investors do during recessions
2) What happens when your home price drops below the borrower amount
1 - savvy investors will be more conservative in their underwriting guidelines. Save as much cash as possible. Be ready to take advantage of discounted properties
2 - It depends on the condition of the property and your personal financial situation. Is the property rented and cashflowing? Then, keep it and wait for the market to go back up. Is the property vacant and in need of repairs? It may make sense to have the lender foreclose on the property. Be very careful with what this will do to your credit and put future deals at risk.
This recession is nothing like the 2007-2008 crisis. A lot of properties have built of equity (hopefully)
Thanks for the insight! In the title, I meant to ask what investors who own homes during recessions do if they have an upside down loan. Either way, it won't affect me as long as the property's cash flowing correct? Because the story I heard (albeit he did preface with the fact that it was a predatory loan) was that the parents made the payments on time but still ended up needing to sell it purely because the lender asked them to. Is that a foreclosure or something different?

@Enoch Li that's something different. That's the lender calling the loan due, which is EXTREMELY rare. Whoever had the loan did not find the right property or the right lender. Don't let one "story" scare you away!
1 Reply
Patricia Steiner
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
3y
Don't borrow problems that don't exist.
It may not happen. This "economic funk" is expected to last only a couple of years versus the normal 7 to 10 years that the historical downturns have taken to reverse.
I recommend operating at all times like "a boyscout." Be prepared. Worry doesn't solve anything and it sure doesn't help. So look at how you can minimize expenses (it's always the right thing to do anyways) and how you can ensure that if push comes to shove, you have the property that is in solid condition with the curb appeal to boost any appraisal and attract investors like me who buy year-round regardless of the economic cycle of the moment. And, as a former banker, I can promise you this: banks don't know squat about real estate. They don't want to own it. They're not good at disposing of it. Stay current on your payments and if you think you're not going to be able to, call the bank before they call you.
All is well...
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Chris Martin:

Those 'edge people' would consider Strategic Default, a term used in the GR when homeowners walked away a left their failed investment to the lender. Even those of us buy-and-hold types had a tough time of it wrt financing. Long-term investors maintained good liquidity and rode out the storm. A lot of people went under. You can find posts about it on BP, from 2008-2012. An example from 2011: Upside down in rental, what to do?
Good luck.

Chris I dont think most folks that have not lived/worked through that period fully understood what the strategic default was.. It was very common in non recourse states. IE Non recourse purchase money states.. Like most of the west coast and AZ NV. for this discussion what that meant is folks could on the OWNER occ home simply walk away with the only thing bad happening to them was crushed credit and whatever cash they had in the house which in those days were very little. And since the banks/servicers were so backed up it took years to get through the foreclosure process in many areas so folks just stopped paying lived for free for 2 yo 5 years and move on when the home was finally lost.. Other states that will sue a home owner in default this was not as prevalent. And of course investment loans were subject to default judgements.. but again so much was going on most folks were able to walk, Although I know some investors who ended up getting sued on their notes and had to go BK to remove it. As noted above some areas did far better than other areas.
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
3y
Quote from @Sam Bhattacharya:

Quote from @Scott Mac:

Some get crushed.
Some make money.
Some sit still.
Some hunt and buy good deals.

How exactly do investors get “crushed”when house prices go down? I wasn’t investing in 2008, but I did own a primary residence.

The value of the house went below the mortgage balance for a number of years. I just kept making the mortgage payment every month as usual. Nothing changed.

House values going down is part of a bigger picture.

Job losses, longer unemployment, lower cost rentals coming on the market with lower rents competing for fewer renters, due to many double or tripling up in SFH's and apartments.

Owners financially unprepared for large expenses (roof, HVAC, major plumbing issues, and can't HELOC or increase credit cards and renters move out of un-inhabitable unit, payments get behind lender seizes the asset.

Divorces force sales at fire sale prices....

Less renters looking to rent, looking at lower priced competitors that would make some upside down if they charged that little.

Owner loses job, or business income falls off greatly, and needs the payment on the rental to survive (replace dead car, etc..) so keeps pocketing the rental income but not making payments on the asset--bank forecloses and asset is seized.

and probably a million other hard luck stories...2007/8 was nothing compared to the early 90's meltdown.

-->https://www.youtube.com/watch?v=7hx4gdlfamo

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Harris Miller
Real Estate Agent · Nashville · Member since 2022 · 14 posts · 5 votes
3y
I would say it would depend on the investor. Investors who have more money will a lot of time invest a lot of their money in a down time to get properties for cheaper as that kind of investor will have the money to spend in a down time as well as funds to hold the properties until markets recover.
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Greg H.Pro Member
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Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
3y
Quote from @JD Martin:
Most of us retire to Florida and play shuffleboard :

That is absolutely incorrect!! We move to Florida and play golf. Tennessee is no doubt suffering from Vols fever about now
1 Reply
Greg H.Pro Member
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Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
3y
In 30+ years, I have been through a few of these
In the late 80s-Early 90s I was just beginning and bought everything I could with the little money I had
In 2008-10 I just waited it out. I had 4/5 flips for sale that received little activity for 6 months. Then they all sold in Mar 2010. However that downturn did not hit Texas as hard as many other areas of the country
Today- I am buying here and there mostly to keep my contractor who I have a long term relationship with busy. I believe things will get worse before they get better. 2017-21 we just so fortunate for me I am in a position to do nothing although the lack of the "deal" has me a little bored
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
3y
Quote from @Greg H.:

Quote from @JD Martin:
Most of us retire to Florida and play shuffleboard :

That is absolutely incorrect!! We move to Florida and play golf. Tennessee is no doubt suffering from Vols fever about now

LoL. Yeah everyone local is loving this year's Vols. I actually went to mid-major schools (East Tennessee State & Valdosta State (Georgia), so I don't follow the "state" school all that much. And I look kind of weird in orange.

I'm not into golf at all, so I just mostly sit in the pool and look at the lake and drink my wine :)
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Kevin Crowell
Real Estate Professional · Mansfield, MA · Member since 2012 · 74 posts · 28 votes
3y
Hi Enoch -
Make sure that you have enough cash reserves and save and be on the lookout for discounted properties and they will be sure to be out there. Good luck!
1 Reply
Ricardo Hidalgo
Real Estate Agent · Member since 2019 · 569 posts · 257 votes
3y
Quote from @Enoch Li:

Home prices dropped in 2008 and I heard a story from a colleague of mine that they lost their house because their home was not enough collateral for the loan. So my question to all my BRRR and 2008-era investors - how did you exit or hang on to your properties? You have to leverage a lot of real estate so what happens when your home prices drop under the borrowed amount?

I think it's crucial to keep atleast 25-30% of cash value on hand to rebalance the portfolio in a downtrending market. I think exposure to market is awesome, but you have to manage your risk. At the moment, we are staying 65% liquid in cash, stocks or crypto just in case we see a bigger plummet. I think that bottoms we start signaling a bottom in 2023.
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