Be Greedy When Others Are Fearful

Russell Brazil · 2020-03-22T09:07:39-07:00

Be Greedy When Others Are Fearful – A Lesson From The Financial Crisis “Be fearful when others are greedy; be greedy when others are fearful.” – Warren Buffett There is a lot of fear in the market place right now. There was a lot of fear in the market from 2007 to 2010. On August 9th 2007 BNP Paribas, the largest bank in France froze withdrawals from two of it’s money market funds. Imagine what that must have been like. At that time, the general public viewed money market funds as no different from any other bank account. Suddenly, and without notice, you as a banking consumer could not use, take out, or spend your own money. This is what most of us point back to as the very start of the financial crisis. From 2007 to the bottom of 2009, the DOW went from a high of 14,164.53, interestingly enough 2 months after the PNB Paribas disaster, in October 2007 to a low of 6,594.44 on March 5th 2009. A loss of 53% over the course of a year and a half. If you think the roughly 30% drop you’ve experienced in the last few weeks is bad, then you probably were too young to be investing 13 years ago. Time of fear though present opportunities for the disciplined investor. I don’t think we have hit a bottom yet, and I am not trying to. It took 19 months from the start of the financial crisis before the stock market hit it’s bottom. It took a full 24 months for housing to find a bottom from it’s peak. By the way, I think if you are waiting for some collapse in housing prices, you are likely dreaming. Now that doesn’t mean they can fall in certain markets, ones that are more prone to a boom/bust cycle; but a retreat in housing prices is simply not a very common occurrence on a national scale. But with the memory of the housing collapse still fresh, recency bias blinds us. I made most of my wealth from 2008 to 2011 by purchasing distressed assets. Those assets were both stocks and real estate. I see opportunity again. I do not think we are near the bottom yet, but I have already started to buy again. I haven't made a stock purchase in the last year until this past week. Im going to continue to dollar cost average as things continue to go

Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

6y

@Russell Brazil Do we get a correction in r.e. prices or a boost from safehaven plays?

From what i can gather we would need about 25-30% correction for prices(nationally) to get back to trend line.

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Russell BrazilBusiness Member

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OP

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

6y

Originally posted by @Will G.:

@Russell Brazil Do we get a correction in r.e. prices or a boost from safehaven plays?

From what i can gather we would need about 25-30% correction for prices(nationally) to get back to trend line.

I dont think we would see a national change in housing prices. Housing is different from other assets, in that most individuals will simply not sell their 1 asset if they think prices are retreating, which creates a very high bottom on housing prices in most instances. The 2008 crisis was unique, in that it was caused by people who had bought assets they couldnt actually afford due to underwriting guidelines at the time. Those circumstances did not exist prior to that, or after that. Then those people who couldnt afford it, went in mass into foreclosure, once that caught up to them. A very unique historical situation.

Now that is on a national scale, and thats why we have only seen housing prices retreat on a national scare twice since the Great Depression. The other time being the early 90s recession, where prices dropped on average about $1800. Certainly, not a significant drop. But what everyone is over looking, is that rarely does a specific market, a specific neighborhood mirror what housing does on a national scale. We get to what the average is by having half of properties perform better than the average, and half performing worse than the average. There are markets very prone to boom/bust cycles, as well as even asset classes within markets that are steady markets. You always need to look at the specifics of the market and asset class to come up with an idea of how an individual asset will perform. During the housing collapse, we still had places where properties went up in value. During the last 10 years of a housing boom, we still had places that went down in value.

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Bola Williams

Real Estate Agent · Rockville, MD · Member since 2015 · 39 posts · 16 votes

6y

@Russell Brazil I could not agree with you more, I've had three separate real estate investor clients call me over the past week/weekend to express a desire to sell what on the market at whatever price they can get so they can get out and get on the sidelines.

As much as I believe that is a bad idea, I personally am ramping up my efforts to buy as I believe there will be great opportunities for those of us who are ready and positioned to make a move.

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Eric X.

Real Estate Agent · Naperville, IL · Member since 2014 · 196 posts · 130 votes

6y

I think it is important to have a warchest or to at least start building it. Probably won't see significant prices declines for a year or a year +.

Stock and options are where it's at for now. Don't think this is the bottom but tons of money to be made due to the volatility. Buying puts the last few weeks has basically printing money. Companies like boeing and United airlines and ripe for bailouts etc etc so educated investor in the market will make a killing. It does take constant monitoring though.

2 Reply

Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

6y

Do you think this is us in a month or two?

https://twitter.com/RobCross247/status/1241325290565111808

1 Reply

Russell BrazilBusiness Member

Moderator

OP

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

6y

Originally posted by @Will G.:

Do you think this is us in a month or two?

https://twitter.com/RobCross247/status/1241325290565111808

Its going to be a rough go for short term rentals in the near future. Short term rentals however was already a high risk investing method with municipal risk being a huge challenge in the sector.

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Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

6y

My r.e. agent pushed s.t.r.'s so hard she turned me off to them in favor of long term properties, but now if we do get a big dump of them into long term pool, i guess my rents are going down.

1 Reply

Tom V.

San Francisco, CA · Member since 2014 · 345 posts · 281 votes

6y

The good times (to purchase) are already here in the securities markets. It will take much longer for these prices to filter into the "real" (SFR rentals etc.) markets, but there's panic on Wall Street.

Some trades I like:

INN - REIT that owns hotel properties. At year end 2019 they had 2.2 billion in assets and 1.1 billion in debt (2:1 leverage). The stock is down 70%. That means the assets (the hotel properties) are being priced at 35% less than what they were in December. Do you want to buy a portfolio of nice hotels for 65 cents on the dollar and no personal debt obligation? I do.

AWP - Closed end fund that owns other real estate stocks. Market panics are phenomenal times to buy closed end funds due to their illiquidity. If you don't know the difference between a closed-end fund and a "regular" mutual fund, educate yourself on this before purchasing.

NHF - Closed end fund Trading for 54% of NAV. A mix of different stocks, but a lot of real estate.

These investments do not have toilets for which you are responsible, someone else collects the revenue, and if you absolutely must DIY stuff, then make your own margarita when your brokerage statement comes.

11 Reply

David BarnettPro Member

Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes

6y

Originally posted by @Russell Brazil:

Originally posted by @Will G.:

Do you think this is us in a month or two?

https://twitter.com/RobCross247/status/1241325290565111808

Its going to be a rough go for short term rentals in the near future. Short term rentals however was already a high risk investing method with municipal risk being a huge challenge in the sector.

I think this is a really interesting development. I was never too keen on short term rentals due to the government/regulation risk as the model became more popular with folks trying to score quick wins. I have a hunch that there might be some opportunities to pick up properties that were bought solely for VRBO/AirBnB and don't work for long term rentals. My hunch is that once the full on recession hits, discretionary travel will subside, leading to an oversupply of short term rentals, diving the price. Might create an opportunity for longer term buy and hold investors to scoop up some deals.

6 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

6y

@Russell Brazil

I see too many people here convinced that they're going to get major rehabs and new construction done within limited timeframes in the next six months, perhaps with a standard small contingency added to their original estimates. This is crazy talk. Anything you have to rehab right now, anything you need guys to show up and work on, should be a very big question mark in your portfolio right now.

5 Reply

Johnny McKeonPro Member

Rental Property Investor · Mesa, AZ · Member since 2016 · 101 posts · 72 votes

6y

thanks for bringing this up.

a 4plex in the East Valley of the PHX MSA just fell through contract and the agent wants me to submit an offer and just sent me the docs to sign but now I'm contemplating not moving forward with this purchase. I would be using a hard money lender (80% LTV, 10%, 1yr loan term) to acquire and then begin renovations and raising rents to market. and then do a VA cashout refinance or FHA and move into one of the units. so my risk is if the property will not hold its value or go down and I cant refinance and/or if my new tennat base will be able to afford the new rents ($950).

My gut is telling me to stay liquid and see how this plays out but there's this FOMO (fear of missing out) side that thinks this will blow over and I won't have a deal. I want another 4plex this year.

how would you guys feel about getting a property under contract right now? to pause and wait or to take action and buy?

2 Reply

Scott Mac

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

6y

We might come out of this like horses out of the starting gate at a racetrack; or

--IF-- the bottom falls out of the service economy jobs when this Corona Virus is over the top 10 Real Estate Markets in the US--MIGHT--see rents adjust downward over the next 24 mos (12 month leases expiring and re-leasing) .

If these bottom end jobs go away temporarily (smaller businesses close or fail or do not reopen), a lot of people may abandon their Apartment situation before their leases end (workouts for them or not).

If Market Rents on Apartments goes down, SFH rents may follow and Section-8 lease renews may also go down.

Vacancy rates on Apartments in the top 10 US real estate markets are going to be interesting after we come out of this.

Class-C apartments will probably suffer the most through all of this, and if SFH rental prices cannot compete due lower rents to putting them into negative cash flow--we may see loan defaults on SFH Rentals in the top 10 markets.

Hopefully it's smooth sailing, and not all 10 markets are equal.

For instance the Texas markets are job tigers, and the San Francisco area is heavily able to work at home, and the New York market is and always has been its own animal--doing it's own thing.

Whatever hit may happen though, it seems like the government will continue on with the MAGA stuff and continue to allow Americans to pull themselves up by the bootstraps vs just talking and lining their own pockets as so many in the past have done. Meaning recovery will hopefully be QUICK (but maybe not totally painless).

Just my 2 cents.

1 Reply

Tom V.

San Francisco, CA · Member since 2014 · 345 posts · 281 votes

6y

Originally posted by @Johnny McKeon:

a 4plex in the East Valley of the PHX MSA just fell through contract and the agent wants me to submit an offer and just sent me the docs to sign but now I'm contemplating not moving forward with this purchase. I would be using a hard money lender (80% LTV, 10%, 1yr loan term) to acquire and then begin renovations and raising rents to market. and then do a VA cashout refinance or FHA and move into one of the units. so my risk is if the property will not hold its value or go down and I cant refinance and/or if my new tennat base will be able to afford the new rents ($950).

Hard money loan on a long term rental assuming constant rents and availability of rehabbers when serious economists are projecting a 24% contraction in national economic productivity and 20% of the nation isn't supposed to leave home? Follow your gut and run away, run away, run away, from this deal.

2 Reply

Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

6y

@Johnny McKeon look up jay hinrichs posts concerning phoenix 4 plexs in last recession, may change your mind.

Short answer, they were toast!

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

6y

Russ,
I had my own trials and tribulations in 07 to 2012 and could not partake in the stock market .. Not this time LOL.

18 months ago I re wrote my presentation I do at RIA's and events like the J martin even etc.

I titled it " The Pivot" and what i meant by that was we are moving from max leverage on some deals to paying cash and live with the lower returns but sleep well with little to no debt.

Well I was thinking i missed it about 90 days ago.. since the market was showing some stress signs a year or so ago but came roaring back..

I still remember talking to my United airlines pilot buddies whose stock got hammered not only then but in 911 and it came back.. so airline stocks that are down 75% they should rebound.. Boeing same thing. and the others since I am sitting here in Sin city.. is the Casino companies down 75%.. I have to learn more about the covered calls and such.. But I opened an account on Friday.. and plan to test the waters..

AS for real estate its just so regional.. its hard to answer the should i buy or not questions since they are coming from folks all over the US.. I think the short answer is some you probably should not.. others if its still a good deal you should.

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Max T.

Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes

6y

Originally posted by @Jim K.:

@Russell Brazil

I see too many people here convinced that they're going to get major rehabs and new construction done within limited timeframes in the next six months, perhaps with a standard small contingency added to their original estimates. This is crazy talk. Anything you have to rehab right now, anything you need guys to show up and work on, should be a very big question mark in your portfolio right now.

Maybe not such a terrible time for us DIY landlords who also work a W2 job (that we are stuck at home from for the time being).

A lot of the work that I would normally sub out - now I'm making plans to tackle it myself. Firstly because the labor is not available, and secondly because now I have the time. And thirdly, to save some money.

9 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

6y

Originally posted by @Max T.:

Originally posted by @Jim K.:

@Russell Brazil

I see too many people here convinced that they're going to get major rehabs and new construction done within limited timeframes in the next six months, perhaps with a standard small contingency added to their original estimates. This is crazy talk. Anything you have to rehab right now, anything you need guys to show up and work on, should be a very big question mark in your portfolio right now.

Maybe not such a terrible time for us DIY landlords who also work a W2 job (that we are stuck at home from for the time being).

A lot of the work that I would normally sub out - now I'm making plans to tackle it myself. Firstly because the labor is not available, and secondly because now I have the time. And thirdly, to save some money.

It is very, very difficult to find a better example than this crisis to illustrate what I've always said is the biggest risk advantage of DIY investing: you are the contractor of last resort.

9 Reply

Mary L.

Rental Property Investor · Member since 2020 · 41 posts · 54 votes

6y

I agree be greedy when others are fearful. Like @Russell Brazil said, the real estate didn’t bottom until a few years later from the peak of 2006 to 2010, and Real Estate would not crash overnight, it takes time to bottom out. It is too early to be greedy in the real estate now. I would Not be greedy yet until at least 18 months plus later, especially in my volatile Las Vegas market. On the other hand, stock market have a shorter time to crash and recover compare to real estate, I agree with Russell Brazil, that it may be a good time to jump in to the stock market little by little (not all in), to dollar cost average the stock market by “CASH” only, not with any margin or other form borrowing. Margin or any borrowing will kill you in case the bottom is still far away from today stock market.

Back in 2008 stock market crash, I jumped in and was greedy when Dow Jones fell 30% from about 14000 to 98000. After I used up all my Cash on the stock market, my biggest mistake was, I was too greedy that started using Margin in my stock account, then Dow Jones crashed another 30% from 9800 to 6600, I was forced to sell many stocks as a loss due to Margin Call. I lost a lot money in 2008 stock crisis. I told myself that I would never use Margin again.

16 Reply

Joseph CacciapagliaBusiness Member

Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes

6y

@Russell Brazil great post. I've had almost this exact conversation with many of my best investor clients over the past several days. I think the biggest mistake that many inexperienced investors are going to make is waiting too long to capitalize on any softness in the market. Getting out there and making offers during this initial panic will probably yield as good a deal as you might find 6-12 months from now. I don't expect to see price declines in real estate overall either, but I think we'll see a few panic sales in the short term.

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Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

6y

Originally posted by @Johnny McKeon:

thanks for bringing this up.

a 4plex in the East Valley of the PHX MSA just fell through contract and the agent wants me to submit an offer and just sent me the docs to sign but now I'm contemplating not moving forward with this purchase. I would be using a hard money lender (80% LTV, 10%, 1yr loan term) to acquire and then begin renovations and raising rents to market. and then do a VA cashout refinance or FHA and move into one of the units. so my risk is if the property will not hold its value or go down and I cant refinance and/or if my new tennat base will be able to afford the new rents ($950).

My gut is telling me to stay liquid and see how this plays out but there's this FOMO (fear of missing out) side that thinks this will blow over and I won't have a deal. I want another 4plex this year.

how would you guys feel about getting a property under contract right now? to pause and wait or to take action and buy?

See, there it is again. Johnny, you really don't see what your biggest risk is in this deal. You want to get a renovation done on a 4-plex during a national emergency. With supply chains being cut left and right all over the world, escalating quarantines, reasonably intelligent tradesmen who have better things to do than run out to job sites all day and expose themselves to infection or any sort of injury that involves going to the disease-ridden hospitals.

But you honestly think that in this deal, you should worry more about housing value changes, bank rates, and what your hypothetical new tenants will be able to afford.

It boggles the mind.

7 Reply

Sam Josh

Sunnyvale , CA · Member since 2017 · 373 posts · 362 votes

6y

In 2008 I started to dollar average Bank of America in the teens and it fell to $3. Sure it came back in due course but the ride down was very painful. I know of buddies a few years back who dollar averaged on GE stock. So dollar averaging might be lucrative rude but it’s not an easy ride.

Problem with sudden crisis like these is a lot of investors are suddenly found swimming naked with very high leverage and limited to no cash reserves. Buying anything for them is a stretch even if everyone else is shivering in fear.

I also think the market while down is still going to recede. While DoW has corrected, the broader S&P is just about the same levels as in Dec 2018. Same with the Nasdaq. Dec 2018 lows were caused by the failing China trade deal. That crisis is a dwarf compared up where we are today. The contagion impact of this lockdown plus oil shocks is TBD. Also not everything springs back in double quick time. The Nasdaq took a whole decade and more to get back to its previous highs set in 2001, just as an example. Oil has not tested its high in years. Who would have thought!

Finally while we all love the Great Warren Buffett’s advice, there are few very unique things he does that many small investors don’t.

1) Buffet keeps a massive amount of cash as a buffer. Always, never breaks that discipline. Many things he is buying he has probably been eyeing for years.

2) Buffet buys equities in established high quality companies (vs class B and class C companies) with deep track records and solid management teams. He is very well connected and besides his instincts he does his homework very well.

3) It’s also well known that Buffet takes a cautious approach to his investments. During the 2008 crisis, he was a big buyer but we also know he used convertible preferred equity (with a fat coupon) as a way in to many high quality companies. Of course he took board seats in many of those companies.

4) Buffet does not speculate! Period.

5) Buffet does not like too much leverage. He loves a clean balance sheet and cash flows.

7 Reply

Matthew Peterson

Developer · Atlanta Ga · Member since 2011 · 47 posts · 37 votes

6y

@Kathy Choi I can relate! I went on margin as well along with starting to play with stock options in 2008. It literally was the worst year of my life (even worse than chasing all the tech companies at the dot-com crash). Learned my lesson big time on using margin!

0 Reply

Joe Cassandra

Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes

6y

Don't buy stocks right now.

Every bear market there is the first shock drop...then it recovers.

At that recovery, people jump in.

Then, they get steamrolled.

A few stories above here.

Even in corrections this happens

In 2018, drop in Feb, recovery. Bigger drop at end of year.

Great Recession was the same...tech crash too.

I'm on my phone so can't pull up the charts, but it's the natural psychology behind the market.

After this stimulus passes, likely a jump will happen and you'll feel you missed the bottom. Another drop will come.

2 Reply

Danny Kay

Developer · Atlanta, GA · Member since 2008 · 148 posts · 34 votes

6y

Originally posted by @Jim K.:

@Russell Brazil

I see too many people here convinced that they're going to get major rehabs and new construction done within limited timeframes in the next six months, perhaps with a standard small contingency added to their original estimates. This is crazy talk. Anything you have to rehab right now, anything you need guys to show up and work on, should be a very big question mark in your portfolio right now.

One of my buddies had a 10% hike on his loose lumber package, this was last Tuesday.

0 Reply

Jon S.Pro Member

Investor · Tampa, FL · Member since 2015 · 530 posts · 92 votes

6y

@Russell Brazil

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