What if the market drops?

Question

I am new to this forum and am very interested in flipping houses. I have rehabbed many houses that I have lived in and sold, but would like to do this full time. I was thinking that we are bubbled pretty high here in Colorado and the stock market seems bubbled as well. What happens if that market drops?  What is the best method of investing in real estate in a declining market? Is that a ridiculous question?  Because, of course, I know that you shouldn't invest in a declining method, but what do investors do in general while the market is declining/especially flippers?

Aimee Marcelo · Answer

Thank you all for your feedback. It has been very helpful :-)

James Bell · Answer

In and out quickly is always the best strategy.  I'm never greedy when selling, only when buying.  Buying is where you will make your money.  Hence, I personally have always done much better in declining markets.  There is always a market for good houses.......priced right......even when everyone tells you it is dead.

Jonna Weber · Answer

I would say make sure that you have a long term financing option in place in case you find that you want/need to keep it as a rental.  Like others mentioned, knowing market rent for the property should help put your mind at ease if the numbers work to cover your monthly cost of holding.  Part of the strategy would be to purchase a home in which you are confident has a high demand as a rental. A good property management company can provide you with valuable information specific to the neighborhood you are purchasing in.

Anson Young · Answer

I dont feel CO is bubbled, we never hit the lows that other areas did, and our rental market is very strong (2-3% vacancy rate).  Our growth is above average in the nation, job growth and otherwise.  Between oil/gas, tech, telecom, space, military contracting, and other strong industries, we are doing very well.  I know as of right now, I have been flipping through the cooler market periods and this hot market period, there is money to make either way.  In a declining market, you can still make plenty of money if you are buying right.

Scott Kelley · Answer

And, as I'm learning, the best method of investing is to find what works for you.  Flipping definitely doesn't work for me, but buy and hold does.  I'm sure it's different for you.

J Scott · Answer

My personal recommendations are to ensure that you're in and out of the property(s) as quickly as possible, even if that means leaving a bit of money on the table (by not waiting for better offers, for example).  And if you notice the market is starting to decline, don't hesitate to get out quickly, even if it means taking a loss on whatever you're currently holding.

Obviously, having additional exit strategies are important as well, but as a full-time rehabber, it's not going to be realistic that every rehab deal will make a great rental.

Scott Kelley · Answer

Wow, from what I've seen, Colorado is poised for a lot more growth and nowhere near a bubble.  It seems to be one of the more stable (and affordable) areas to jump in, but yes, there is always risk.

Colorado Springs, for example, has had 2 or 3 years with significant home damage due to fires, floods, etc.  Those people will be needing to find a place to live and some have chosen to not rebuild their previous places.  In addition to that, the military continues to add troops out there.  It's definitely not got the business power that the West Coast has but I don't think it's anywhere near the top end right now.  My opinion anyway.

Regarding your question, this is why having multiple exit strategies is so important!

Jean Bolger · Answer

With real estate there's always the chance you'll lose money. That's something that a lot of folks lost sight of for awhile there. But I'm not sure what signs you are seeing in the front range that would lead you to believe our market is about to hit a decline.

But to answer your question: I'd say for most flippers the obvious alternative exit strategy would be to hold the property as a rental until their market returns to a level where they can sell. So you'd probably want to have some idea of your local rental rates and take that scenario into consideration when you run your numbers and arrange financing