Hello @Wendell De Guzman,
No one knows the answer to that question because each time the cause seems to be different. And, I believe that tracking NODs may tell you what has already happened as opposed to what is going to happen. Perhaps this metaphor will help explain my view. If you contract measles, you will likely have a red rash. However, by the time the red rash appears, you already have the virus and your options for preventing the virus are nonexistent. The rash is the same as NODs. By the time NODs ramp up, the economy is already well into the crash. In Las Vegas during the 2008 crash, the time between the month the first payment is missed until the NOD is filed is between 6 months to 3 years. So, instead of predicting the timing of a crash, a much better approach is to prepare for a crash (at least from buy and hold point of view).
Preparing for a Market Crash
In my opinion, the best way to prepare for a crash is careful selection of your investment properties. This includes both the location and the type and rent range. Here is a link to a post on selecting the right location so I will not repeat it here. What I will cover here is the effects of rent range on rental income stability during times of economic stress.
I believe the goal of investment real estate is sustained profitability. Part of the necessary elements for achieving sustained profitability are:
• A population of tenants that are unlikely to lose their jobs during reasonable instability, like 2008 in Las Vegas. See my previous post in this thread on how rental properties performed during the 2008 to 2014 period.
• Good tenants - A good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property and stays for multiple years. Please note that tenant quality does not necessarily correlate to rent rate.
Rental Sweet Spot
Each market has what I call a rental sweet spot. This is the range of rents that has the largest population of potential tenants. I will explain this statement but first, I will make some generalizations that I will use later. Remember that generalizations will not work for specific cases but are usually more often right than wrong. The assumptions I will use are:
• A property that rents for $500/Mo. is generally less desirable than a property that rents for $1,000/Mo. to the average tenant.
• People would choose to live in a property that rents for $1,000 than a property that rents for $500, if money were no barrier.
• If a person can afford $1,000/Mo. rent, they are unlikely to want to rent a $500/Mo. property.
• Except in special cases, people are unlikely to spend more than 30% of their monthly income on rent.
If you plotted the number of tenants who wish to live in a property and can afford to live in that property, the number of prospective tenants by price would be something like the curve below.
There is a relatively small number of renters who choose to live in undesirable areas or undesirable properties if they can afford better. And, there is a small number of tenants that can afford to pay a very high rent. In real life, the curve would be flatter, wider or skewed to the left or right but the concept does not change. The green rectangle below delineates what I call the rental sweet-spot. Properties that rent in this rent range have the largest population of potential tenants (resulting in higher rent and lower time-to-rent) and you are more likely to end up with the highest quality tenants. More about quality tenants later.
You could segment the curve by job/income level (The following is a silly segmentation but bear with me.) as shown below.
Each of the potential tenants in each segment are subtable to different market challenges. For example, if your rental properties targeted the minimum wage class and as the minimum wage increases, the number of available jobs are reduced, you are going to have decreased rents and increased time to rent. The point is:
• Different price ranges (or segments) can and are affected by different market changes.
• To minimize the vulnerability to such market risk, you want to buy properties that fall into the rental-sweet spot because you will have the largest pool of potential tenants. If you do this, you are more likely to still be able to rent units out even in time of economic challenges.
Tenant Quality vs. Rent
I mentioned earlier what I consider to be the characteristics of a good tenant. Good tenants come from effective screening by the property manager, not from the rent range. So, if I targeted the "doctor/lawyer" segment (a property that is expensive to rent), I might have only one or two applicants to select from when I am trying to rent the property. If this is the case, the odds of selecting a good tenant are reduced. If I target the sweet spot I will have far more tenants to select from and the odds of selecting a good tenant are increased.
Summary
• It is very hard to predict a coming crash far enough in advance to take proactive action. All the "experts" missed the last one and they will likely miss the next one.
• Market crashes have and will occur in the future.
• The best way to protect yourself is to buy properties that will rent in the rental sweet-spot so you have the largest number of potential tenants.
• Only careful screening by the property manager of a significant number of applicants will increase your odds of getting a good tenant.
Wendell, this is a long answer to a short question but I hope this helps.
