Buy & Holders- Concerned About the Predicted 2017 downturn?
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Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
9yInteresting discussion. Would love to hear some responses from people who went through it in 2006-2008.
I currently have a few long term buy and holds but I don't plan on selling. The reason being cash flow is king. Value varies. As long as you cash flow enough to absorb a decrease in rent, then just keep on trucking.
Now if I had 100 SFH's cash flowing only 100-200 / mo with current equity less than 25 percent. I'd be nervous. 50 percent equity at 100-200 I rest a lot easier. Or cash flow 300-600 a month with less than 25 percent equity, I'd be comfortable.
If market down turn occurs, rents may decrease or vacancy may increase. This can be argued but many claim this occurred in 2009-2013. So I'd just want to be prepared against it.
If you tell me my house is worth 50k or 500k, doesn't matter so much to me, if I'm not planning to sell it and it's putting 500 a month into my pocket.
70 Replies
Originally posted by @Jay Helms:
What do you think Denver, San Francisco, Phoenix, Dallas?
What specifically is your question?
What experts are you referring to? What asset class will be driving this recession that you're talking about? What evidence do you have that there will be a crash in 2017?
There isn't a lot of pressure in real estate at this time on a macro level. There IS pressure in other asset classes such as student loans and auto loans, both of which are traded as asset backed securities. Additionally, ABS, CDOs and CDS instruments aren't traded on 200:1 leverage as they were in the past.
I can't say what will happen in 2017 - 2018, but I think making claims that there will be a recession isn't supported by sound economic research. I mean, trump is going to lower the corporate tax rate and allow companies to bring their cash back to the United States. Last time I checked, those were expansionary policies. And what of this 2 year stock market return we've experienced in the last month? How does that signal a recession?
The increases in housing prices are driven by a housing shortage rather than speculation and or lackluster underwriting. I think this market has room to run. Additionally, 25bps shifts in rates are largely aesthetic rather than functional. How much can these rates really impact the economy? They can't. Rates < 8% are still expansionary rates.
As for buy and hold... I will continue buying. I will build a cash flow cushion into my deals so as to handle harsh economic scenarios, even though vacancy doesn't tend to drop in a recession. I would be more concerned about the equilibrium price for rent decreasing in specific regions. Maybe this is something that the 2006 - 2008 buy and hold investors can help me understand.
- Real Estate Investor · Plano, TX · Member since 2016 · 39 posts · 13 votes9y
I recently sold all my securities and getting out of the stock market all together due to the volatility we are experiencing. So far with news the Feds increasing interest rate we are seeing large sell off.
I agree with everyone that the market will slow down in the upcoming year. Already the housing market is on a slight decline. http://www.reuters.com/article/us-usa-economy-idUS...
I think the slow down will offer greater opportunity for investor who have cash on hand when the market does go south.
For me i will continue to search for rental deals because DFW is a growth market and I am confident rentals will ride through any recession.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
If we're talking buy-and-hold I think I'd be more concerned about adjustable rate loans potentially resetting than a downturn (in equity). Especially with community banks, a lot of multi-family loans are 5-year ARMs with a balloon payment. If that 5 years ends in the next 24 months and the Fed raises rates 3+ times you could be looking at another point in interest. While it doesn't sound like much if the property is highly leveraged you could easily go from cash-flow positive to cash-flow negative. Not to mention if the appraised value goes down you could really be in trouble. That being said you'd probably have to have interest rates rise without an associated increase in rents and tack on a lending institution that doesn't want to refinance.
Why not cash out refi and wait for buying opps, thus dollar cost averaging? This seems to mitigate the risk well. If your properties keep going up, then no worries. If they go down, you have tons of cash to double or triple down on more properties. When they inevitably bounce back, you'll still be much better off than before.
- Cary Ferguson Jr - thank you for your reply . The nationally recognized experts I've heard predicting an upcoming downturn are Robert Kiyosaki, Grant Cardone, Harry Dent, Bert Dohmen & Rod Khleif - just to name a few. Local experts in Pensacola include a handful of mortgage lenders & realtors.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jeff Schneider yes AZ will be great until they run out of water LOL..
and you were forturnate I knew many many bay area investors that got totally wiped out in AZ in the down turn with their buy and holds.. they had bought a bunch of 4 plex's through Linda Gercheck all turn key fly buy stuff.... at the top of the market.. nothing can solve 100% vacancy which is what occurred.. the same clients bought props from me in PDX and were able to weather the storm.
I just had this conversation yesterday with a big PM I know on the West coast about 6 thousand doors. and his comment was the these reits and syndicators building new buildings like mad are in jeopardy... building costs have risen to 400 a foot for these buildings so a 1,000 sq ft 2bd 2 ba is running 400k out the door New mid rise construction... rents are 2.50 a foot and tons coming on the market... he predicts a flood and lower of rent.. and with Syndicators and reits they are highly leveraged to the point they will see no returns and or He said he knows of the first one that is defaulting already on its mortgage.. cant get occupancy up and quick enough.. So time will tell. but I think those that sold Multi at rediculouis cap rates were smart and those that are buying multi at the peak are in a risk position unless they have Very large equity stakes.. anything boardering 75 to 80% leverage could find themselves in a negative cash flow situation.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Jay there is an irrational thought process that all cash flow properties will run smooth in a big down turn and that simply is not the case... if that was the case you would never have seen all these multi families in foreclosure from 08 to 2012.. or SFR owners lose their homes by the droves... rentals or owners... most folks simply have too much leverage and not enough liquidity to ride out the storm if they do get vacancies for any extended amount of time....
Even to this day probably 25 to 35 % of all wholesale deals in need of rehab come from failed landlord syndrome... just drive around any major metro city.. Chicago Philly Cleveland Detroit etc.
some of this is social obsolecense and some of it is functional.. and some of it is landlords that simply suck at being landlords.. and they bolt
- Residential Real Estate Agent · Phoenix, AZ · Member since 2016 · 155 posts · 117 votes9y
Not a huge fan of the turn key stuff. I always preach responsible buying because if you don't have equity and are not making money, it's no fun.
- Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes9y
I'm excited for the next down turn, great opportunity to purchase. I came in on the tail end of the crash and am still seeing opportunities in LA and nationwide today.
In a non economic obsolescence area, without bizarre circumstances or serial refinancing, who has not experienced gains when owning long term (15-20+ years)?
I feel that if you don't over leverage on a home, can cash flow, and if one has significant reserves to weather a storm, one should typically be okay. Is this ignorant thinking or rationale?
- Lender · Vancouver, WA · Member since 2016 · 13 posts · 3 votes9y
Originally posted by @Luka Milicevic:
These same "experts" have been calling for an inevitable crash since 2010. When is it going to happen? It's always "next year"
I am always buying long term buy/holds. There will never be a perfect time. Every time is the right time IF you buy smart.
Right now i'm in a very hot market and I buy ONLY good deals. I have passed on so many deals where I have been outbid. The investors that outbid me should be the ones concerned about what the market does.
When I buy I plan on holding for 20,30,40,50 years. IE: LONG term. In this timeframe the market will change many times over. As long as you buy right and manage well, all market conditions are manageable.
Luka, what do you consider a good deal in your market?
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes9y
I am in Phoenix, ground zero of the 2008 meltdown. I can honestly say I am not concerned. I fully anticipate home values to drop, but rents will probably not drop. And chances are they will probably rise. My DTIs are low, I have cash to weather the storm. It is really hard for me to buy what I want to expand as I go for A and A- minus properties. I won't settle.
- Investor · Toronto, Ontario · Member since 2016 · 19 posts · 4 votes9y
I wasn't quite in acquisition mode in 2006-2008. I waited until 2010. I'm Canadian and just kept watching until things bottomed out in 2009/2010. I bought short sale condos and detached houses in PHX. It worked out great. Prices were less than replacement value and the CAD and USD were at parity.
Since then, $1 USD = $1.33 CAD, condo prices have doubled and detached homes have tripled, rent is up 15%, and vacancies have dried up. But yields have been crushed.
I don't follow predictions. They're just fodder drive ad dollars to publishers.
If 2010 was any indication, I know that if another downturn hits I'll have a lot of time to dig around.
Originally posted by @Jack B.:
Why not cash out refi and wait for buying opps, thus dollar cost averaging? This seems to mitigate the risk well. If your properties keep going up, then no worries. If they go down, you have tons of cash to double or triple down on more properties. When they inevitably bounce back, you'll still be much better off than before.
A cash out refi always scares me, doesnt that increase your monthly payment and lower your available equity? If values drop a lot and you need to sell, arent you cashing out the equity you otherwise would have had available? Personally I like properties where that I could sell in a pinch in a major financial crisis even if the market drops like it did in 2007-2009.
My 2 cents for what it is worth is that some real estate markets will take a bad hit, some will do OK, some will keep going hot and go up. Real estate is local. While some national trends, like interest rates can effect all markets, most markets have factors that keep them strong for some reasons and some have factors that make them go weak while others stay strong. In 2006 and 2008 our local real estate market did just fine. I don't recall any increase in bankruptcies. Now in the 1980s we got hit so hard you could have bought half the town for take over payments at the bank. Wish I had bought 20 houses then. It was the price of oil that drove our local market. Interest rates had little to do with our boom or our bust.
It is easy to say you will buy like mad in a recession, but when you see folks losing houses left and right, prices are dropping hard, it difficult to remember that it will change some day. I had no money to buy when the last recession hit here. I was amazed when the local bank took my offer on my primary house that they were holding. We have had bust boom cycles and we are headed into a bad bust cycle now. Prices have dropped a bit and we are seeing foreclosures again, and quite a few of them. However I still cannot make any money buying SFRs at the current prices. I strongly suspect prices will keep dropping for a few more years, but it seems the slack is being bought by out of town investors.
In any market you still have to buy so that it cash flows or you could end up in trouble rather quickly. I have had a more difficult time renting lately. In fact I lowered rental prices on several houses this fall in order to rent them. It may have been a good idea as I am seeing almost double the amount of For Rent adds as I used to. Still I am worried. I bought aggressively in 2014 and part of 2015. I began buying and selling this year. I look for deals, and I am looking to unload some properties when I can. I am not sitting on piles of cash, I am paying down my notes to get in better equity position. For the last 2 years I have been fixing or replacing big ticket items in hopes of being able to go through lean times if needed. I have turned down deals I would have taken 2 years ago. I am getting 20 year loans instead of 15 year loans. I actually expect to see a few of the out of town investors give up and sell out in the next 5 years. A pretty nice 4 plex sold only a few blocks from my residence a few years ago. The current owner bought it, raised rents and inside of 1 year has probably averaged a 50% vacancy rate I am very confident he has lost money every year for 3 years. Be wise in your current purchases and I think you will be OK. Good luck
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Interesting read.
I have literally talked to over a thousand investors over the years and discussed many perspectives related to various asset classes.
Cycles last about every 8 to 10 years peak to trough. General flow is entry level SFR comes back first, followed by duplex,triplex and quads, then larger multifamily, then STNL retail, then MTNL retail, then office, industrial etc.
I saw 2009 SFR come off the bottom, then 2,3,4 units in 2010,2011, then large multi 2012, then STNL 2012, then MTNL retail 2014 and up.
There will always be buyers and sellers just less of the value king in the market when cycles top out. If you don't like the cap rate of existing property you might have to build to get the cap rate to cost you want.
I am on the commercial side and if anything I see an acceleration of business. With Trump moving to cut corporate taxes and ease red tape for businesses there is a bullish move to expand by retailers. The pro-business environment can really kick start commercial into a high level.
Some say student loans are the biggest killer looming but many students are poor with subsidies and defer loans anyways. The real killer economists are saying is Obamacare which is hopefully getting repealed soon.
People on the subsidy works because they have no money but most middle class Americans all of their income is going to pay these junk insurance premiums that don't cover much until you hit sky high deductibles. These plans are stifling discretionary income moving into the economy for the middle class.
I am currently doing projects where cap rate to cost for STNL is 9.5 to 10 plus cap. I can hold or sell off to a buy and hold investor. If you stay under the 4 million range for resale there are a lot of 1031 exchange buyers who can take down all cash or even with a low cap can buy at 5 or 6 cap with 50% down etc.
My friends that own a lot of properties if buying existing is like stock. You have your criteria and in a hot market might not buy as much hard assets maybe 1 or 2 a year and then churning yield in more fluid assets that are easy to liquidate and get back capital. Then when cycle goes low again they stock up and buy as much as they can. So you are still holding but planning to load up on the recycle again.
I just enjoy businesses as residential is getting heavily regulated in favor of the tenants and peaking out so it is more of a hassle for me then the return it generates for my time.
If the cycle changes i can simply hold a 15 year NNN from a national tenant at a high cap rate I developed and then wait for the right time in the next cycle to sell. The key is not to get overextended based on high cycle resale expectations. It's needs to be icing on the cake and not to make the deal pencil.
75% leverage can be fine if cap rate is high enough on a property.
Originally posted by @Jay Helms:
Thanks for the info Jon S. How many properties did you purchase between 2005-2007, do you still own them today and what IRR #s did you experience between 2008-2010 on those properties?
I don't sell SFR, with exception that if the neighbhoorood turns down and I'm unable to attract quality tenants. I can't give you IRRs because I haven't sold very many of them. Of the one property I did sell, it achieved a 25% IRR.
Originally posted by @Jay Helms:
Cary Ferguson Jr - thank you for your reply . The nationally recognized experts I've heard predicting an upcoming downturn are Robert Kiyosaki, Grant Cardone, Harry Dent, Bert Dohmen & Rod Khleif - just to name a few. Local experts in Pensacola include a handful of mortgage lenders & realtors.
All real estate marketed are cyclical. It is fundamental. All markets will likely go through the "recession" phase of the market cycle in the next 12-36 months. I suggest you clarify what you mean by an "upcoming downturn". Also of the "experts" you mention, I would not give any of their comments much weight. I do not consider those people experts in real estate market cycles. I suggest you lookup and follow the work of Dr. Glenn Mueller if you want to learn about market cycles.
- Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes9yI live in Denver. Have lived in the same house for over 20 years. The prices on housing here in Denver is outrageous and I see a bubble no matter what other folks tell you. The legalization of pot in other states will drive people away. Professional level jobs (accountants, lawyers, executive type positions) are decreasing. Aside from BP coming into Denver in 2018, most of the news is larger companies are leaving. CenturyLink reducing the Qwest footprint will also be decreasing the Level 3 footprint, etc. This market can't sustain that. There are always deals...it's a big country. Don't focus on one area, diversify, and it won't matter. I just bought two in Evansville, IN. MarketWatch published an article this week indicating the city is one of the top 10 miserable places to live. People still need a place to stay even if they're miserable. Go figure.
- No one can time the market. But the best practices are always 1. Don't over extend yourself. (Don't leverage to the neck) 2. Always have liquidity available, not just credit line but hard cash, at least 10% of your equity in all investments 3. Follow acquisition disciplines but never stop investing ( that means in expensive times, if you follow acquisition disciplines, you will buy less or none at all) 4. (Some folks will disagree with this) don't underwrite growth. Assuming you exit at the same basis of your going in, see if the deal still works With these you should be able to achieve safety and prosperity (but guess what, many people violate these rules, one who did not violate is Warren Buffett)
- Investor · Fort Worth, TX · Member since 2016 · 21 posts · 15 votes9y
Great topic and responses. If you are a "buy and hold" investor and are buying right (70% arv- repairs), then there should be no real concern of a downturn in the housing market. You should already have a cushion from buying right that would offset a decrease in rents.
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