Market crash prep

[Coe Davis]

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

[Carlos Ptriawan]

Quote from @Coe Davis:

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

 Usually in scenario like this, you already made terrible decision in the past, especially during purchase. Lets say median price in your neighborhood is 500k. But you purchase $1.5 mil expecting 8K rent for example. Then market drop, let say to 450k and max. they can pay you is 5k. If your other income is strong you can ride the wave until market recovers.

[Randall Alan]

Quote from @Coe Davis:

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

@Coe Davis
 I think you are worrying about something that likely won’t happen.  Keep in mind that the housing market is different than the rental market.  The housing market can crash all day long and it will literally just drive up demand in the rental market because people can’t afford to buy a house. 

Ask yourself this:  when is the last time your rent / mortgage payment ever went down?  Or overall prices on cars, or groceries, etc?

It’s not that market rent can’t decrease, it’s just unlikely.  Here’s why:  any property owner… regardless of when they bought their property… is going to charge enough money to pay their mortgage and related expenses, plus make some level of profit.  As expenses increase, you raise your rent to compensate for those increases.  You also raise your rent when the market rent increases because of demand & lack of supply. 

So let’s say inflation goes to 18%, interest rates go to 18%, etc… pick your doomsday scenario…

Every landlord already in the market still has the same (relatively) fixed expenses they did the year before.  They will not lower their rent prices because of economic instability.

Likewise, let’s look at the reverse… everyone bought their property at 12% interest, and now rates are at 2%… are the new landlords who have lower expenses going to market their properties at some big discount to try and undercut all the old landlords at 12%?   I think not… they are going to take advantage of that difference and bank the extra money. Plus, you are going to do a cash out refi and lower your mortgage expense to take advantage of the low rate as well. 

Can you get into a margin squeeze (ie. Is there some risk of losing money in real estate?). If you bought on a thin margin you can end up upside down… definitely… but I would argue the pressure would come from a different direction:  it is more likely that rising taxes and insurance rates will eat up your profits where you don’t make as much or any profit if you bought poorly (ie. Very little profit potential).

The broader point being that capitalist influences will likely keep real estate rents going up.

I can envision a situation where let’s say the ‘big local employer’ closes up and 5,000 jobs goes away and there are no other jobs for that employee base.  Those people  move away and now there are suddenly 1,000-2,000 extra rentals with less demand.  I could see rents deflating in such a situation, but barring a sudden lack of demand like that I don’t see that situation happening,

But to your question, what do you do?  Your exit strategy is to sell the house.  Hopefully you have made progress on your mortgage and also real estate prices moved up in the meantime and you make out with a profit.  You can keep playing out the scenario by saying “yeah but what if I owe more than it’s worth?”  At that point you can often negotiate with your lender to keep the house under a deferral program like people did around 2008, or do a deed in lieu of foreclosure to hand the lender  the property and walk away. 

So while it’s  possible to lose in rentals, it’s unlikely if you bought right.

Randy 

[Minna Reid]

Well then you realize you made a bad investment. Happens all the time, and we're gonna see a lot more situations like this soon. If you're losing money owning the property, sell it, or if you lack the equity to do so - pursue a short sale.

[Rick Albert]

Do rents go down considerably during a recession? Is there data that supports that? Keep in mind in any economic downturn, people need a roof over their head.

Also factor in that a recession doesn't equal declining home prices. In the last 6 recessions, only twice were there price reductions. Remember that a Recession is defined as two declining quarters of GDP. That means by the time we found out we were in a recession, it may have already come and gone.

If the market crashes, it is a paper loss, nothing else. You just wait it out.

If you want, you can try to contest your value with the county assessor and get your property taxes lowered.

I would also pay close attention to what your tenants do for a living when looking for new tenants. My last tenants worked at a grocery store and in social services. Those professions are needed no matter the economic climate.

[Bill Brandt]

Ins 2016 the median Vegas home was $219k. In 2020 it was $391k. In 4 years the prices went up 81%. Rents went up about 25-40% depending on the area. Housing prices and rent just aren’t as correlated as you think they are. 

When interest rates doubled in 12 months, buying became way more expensive, rents should have skyrocketed. We’ve just gone through 6 years where buying was cheaper than renting and people still rented. If prices drop 20% (I don’t think they will, too many people have locked in low interest debt.) the cost of buying would still be more than 2021 because of the interest rates. 

I’ve only been at this 25 years, but I’ve never seen a rent decrease. But I do agree if you are in a bad market you could get squeezed by people fleeing. But I think that will happen even if the economy takes off like a rocket. Landlords are fleeing local governments that hate them. Everyone else fleeing taxes/regulations/laws they don’t think improve their lives. Areas that Arjun by the government employees for the government employees. 

As a side note: I watched a video of cities that people were fleeing, almost all in the rust belt. Cincinnati, Pittsburgh, Detroit, Baltimore, Minneapolis, etc etc. Did you know that all 10 cities on the list had peak population in the 1950 census. They’ve all been slowing dying. 

[Jim K.]

@Bill Brandt

The game's different out here. Yes, Pittsburgh is slowly changing into something much, much smaller than it used to be and yes, people here have real trouble accepting it, but there is money to be made off the city's death throes and people's tunnel vision.

[Bill Brandt]

@Jim K.

I know what you mean. I was surprised to see Minneapolis on the list.(it shrank from 500k in 1950 to 400k in 2020).  But I left 25 years ago and downtown is a little scary. When I use the lite rail to and from the airport to visit family I don’t think I would bring kids with me between 7pm and 7am. 

[Rob Jacobs]

Quote from @Coe Davis:

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

Sounds like a short sale would be your best option unless you can get another investor to assume the loan and take it over.

[Coe Davis]

Thank you all for the reply. I just want to prepare myself best I can before I get a mentor and dive in to this profession. I think I’m ready.

[James Hamling]

Quote from @Bill Brandt:

@Jim K.

I know what you mean. I was surprised to see Minneapolis on the list.(it shrank from 500k in 1950 to 400k in 2020).  But I left 25 years ago and downtown is a little scary. When I use the lite rail to and from the airport to visit family I don’t think I would bring kids with me between 7pm and 7am. 

The Minneapolis #'s can be deceiving. Post '50' is when there was the massive suburb explosion, and that is what drew people from Minneapolis, to the suburbs of Minneapolis.     Same thing happening today, with all the chaos and mess that is Minneapolis, is another suburb-rush. We have suburb city Like Maple Grove in '90' it was 40k people, now it's pushing 80k. Plymouth same story, doubled in population over 20yrs. Pre-covid Otsego was a name people would say "huh, where", of literally a few thousand people, now it's speeding past 30k and city planers are building infrastructure for 70k+. There is about 4 dozen cities in the suburbs of Minneapolis with the same story. 

The "cool" of inner-city life is done, kinda funny how lawlessness, riots and loosing 50% police force does that huh, whod-a-thunk-it..... oh yeah, that's right, EVERYONE except politicians....

Strong migration trend in action of people and business leaving the inner-metro-ring too the outer-metro-ring. I can't keep inventory of places in outer-metro, I am leasing about 95% before existing tenants even move out, off videos alone, before I can even offer in-person showings. In Minneapolis, whole different story. I have 0 holdings in Mpls or St Paul anymore, I don't think I'd even take a property at 50% market value, just too much headache. 

So yeah, Mpls on STRONG down-trend but suburbs are shooting through the roof. Just another suburb rush. It's the cycle of things. Remember, Twin Cities metro is 7 counties, 182 communities, 3.69 million people. Minneapolis is just 1 small part of that pie. 

[Henry Clark]

Looks like your just starting out. 

Look across your financial spectrum

1.  What are the numbers on this unit.  Including some capex?  What is the cash float?  
2.  Why are you saying the market crashed?   There is still a shortage of houses.  
3.  This is a rental house. Do you have a home?  Can you sell it with the 2 out of 5 year primary residence and pull cash off the table?  Live in the rental?  The value should come back. 
4.    How stable is your job?

5.  What finance terms do you have in the rental?

Look at how stable your finances are.  

[Todd Dexheimer]

Quote from @Bill Brandt:

Ins 2016 the median Vegas home was $219k. In 2020 it was $391k. In 4 years the prices went up 81%. Rents went up about 25-40% depending on the area. Housing prices and rent just aren’t as correlated as you think they are. 

When interest rates doubled in 12 months, buying became way more expensive, rents should have skyrocketed. We’ve just gone through 6 years where buying was cheaper than renting and people still rented. If prices drop 20% (I don’t think they will, too many people have locked in low interest debt.) the cost of buying would still be more than 2021 because of the interest rates. 

I’ve only been at this 25 years, but I’ve never seen a rent decrease. But I do agree if you are in a bad market you could get squeezed by people fleeing. But I think that will happen even if the economy takes off like a rocket. Landlords are fleeing local governments that hate them. Everyone else fleeing taxes/regulations/laws they don’t think improve their lives. Areas that Arjun by the government employees for the government employees. 

As a side note: I watched a video of cities that people were fleeing, almost all in the rust belt. Cincinnati, Pittsburgh, Detroit, Baltimore, Minneapolis, etc etc. Did you know that all 10 cities on the list had peak population in the 1950 census. They’ve all been slowing dying. 

 Most major metros saw rents decline during the great recession

As for the population decline in the midwest, you need to dive more into details. Yes, those cities peaked in the 1950's, but urban flight happened. The MSA increased in most cases, meaning the area is still growing. BTW, Cincinnati and Minneapolis are currently both growing cities. 

[James Hamling]

Quote from @Coe Davis:

What do you do when you purchase a house, rent it out and then the market crashes and the house is no longer worth paying such a high rent rate to potential renters comaparing them to other houses  but you are still stuck with a high mortgage payment?

Ok, let's "game" this out. 

For theory/argument sake, let's say both sale price and rental rates "crash" for what appears a prolonged period of time.  

So, one may see this as a problem.... What I see is "Leverage". What is best to do with leverage? USE-IT.     

This actually did happen before, and people used that leverage, so much so that a phrase was coined from it; Strategic Default. 

[Dan Heuschele]

Quote from @Bill Brandt:

Ins 2016 the median Vegas home was $219k. In 2020 it was $391k. In 4 years the prices went up 81%. Rents went up about 25-40% depending on the area. Housing prices and rent just aren’t as correlated as you think they are. 

When interest rates doubled in 12 months, buying became way more expensive, rents should have skyrocketed. We’ve just gone through 6 years where buying was cheaper than renting and people still rented. If prices drop 20% (I don’t think they will, too many people have locked in low interest debt.) the cost of buying would still be more than 2021 because of the interest rates. 

I’ve only been at this 25 years, but I’ve never seen a rent decrease. But I do agree if you are in a bad market you could get squeezed by people fleeing. But I think that will happen even if the economy takes off like a rocket. Landlords are fleeing local governments that hate them. Everyone else fleeing taxes/regulations/laws they don’t think improve their lives. Areas that Arjun by the government employees for the government employees. 

As a side note: I watched a video of cities that people were fleeing, almost all in the rust belt. Cincinnati, Pittsburgh, Detroit, Baltimore, Minneapolis, etc etc. Did you know that all 10 cities on the list had peak population in the 1950 census. They’ve all been slowing dying. 

>I’ve only been at this 25 years, but I’ve never seen a rent decrease.

according to the department of numbers (https://www.deptofnumbers.com/...) Las Vegas rents fell substantially at the Great Recession.  Las Vegas rents still have not recovered from the GR and is currently lower than in 2008.  

I recognize you indicate previously that due to the properties you purchased, you did not experience the loss of value that Las Vegas in general encountered.  It is possible same thing with rent rates.  However Las Vegas rents in general are lower today than in 2008 (source department of numbers).

good luck

[Bill Brandt]

You have to be looking at an inflation adjusted number or something being skewed by “median” including a bunch more apartments or a bunch less houses. Again personally my rents have more than doubled. Here’s a better site since it compares rent by by bedrooms. Although rentdata says they’re only up 50%. That’s a far cry from down…

https://www.rentdata.org/state...

https://www.rentdata.org/state...

Ps. Zillow says there are 2540 rentals available in the las Vegas valley. It also says only 214 of them are less than $1200. If you want to rent today for their median you have to eliminate 90% of the available units. 

Ps  it says 3 of those 214 are houses but they sure look like 4plexes. So again the they’re referring to apartments not houses  

https://www.zillow.com/las-veg...

I like to hear from any Las Vegas property manager that is collecting lower rents today than in 2008. I don’t think I’ll get any responses. I would assume 50-100% increases. 

[Alex Deacon]

We can go on and on about when the market will tank etc.. NOBODY KNOWS. I think we are heading for an economic meltdown and if that happens it wont matter what business you are in. its going to be hard as hell. Buy smart, be selective and work your *** off to learn the business. If it fails at least you tried. If the economy really takes a downturn then what's the difference at that point. We will all be in the same boat. 

I do believe there are certain states that are on the up and coming and growing and you could get a much better long term return. For me, I am not willing to move my business or take the time to learn those markets. I focus on the Pittsburgh Market and I am very good at it. There is only so much time in a day.

[Brady Ferguson]

This is a prime example of why cash is king. You have more room for error when you have a safety net. 

[Brad Jacobson]

There are a lot of books and real estate advice out there talking about how to buy with no or low money down.  I don't think this is typically wise advice unless you're house-hacking to simply cut down on your living expenses.

It's important to invest from a position of strength.  Have $10k in reserves for each property you own at all times, buy with at least 25% equity, be and be conservative in your rent estimates.  If you do all these things and have the income to support your investing, you'll be fine.

Good luck!

[James Hamling]

Quote from @Jay Thomas:

Real estate markets can be unpredictable, and there are times when a market crash may cause rental rates to fall significantly. In such cases, it can be difficult for landlords to make their mortgage payments if the rent from their properties is no longer competitive in the current market. Fortunately, there are several strategies that landlords can use to maintain cash-flow during these challenging times. Renegotiating rent with existing tenants or seeking out long-term renters who may be more willing to pay a premium rate can help bridge the gap between what you owe on the mortgage and what your renters are able to pay. With some patience and creative solutions, landlords can survive a real estate market crash.

ChatGPT has spoken.......

[Matt Bishop]

@Coe Davis, What area is your investment location? Do you want to keep living in that area? How much equity do you have?

[Matt Bishop]

@Randall Alan, I think Coe was saying comparable rents have gone down and he is experiencing negative cash flow. I agree with you, short term fluctuations in sales prices don't matter unless you're selling. Would you agree selling is a last resort? I regret ever selling any of my houses. Even though I rode out vacancies and vandalism at a couple of class C houses, time has been good to me and those nightmare houses are now paid off, worth 3 times what I paid for them and are steadily cash flow positive and still appreciating.

[Matt Bishop]

@Coe Davis, you continue to be an honorable man and you make up the negative cash flow and you make the mortgage payments until rents come up. Unless you are in a declining market, hang strong and come out a successful investor. If you believe property value is going to decline long term, sell now and buy into a better market. Most important thing is to maintain your strong self esteem by honoring your word and make your lender whole no matter what you have to do.

This doesn't seem like an immediate crisis so think "long term" I bet things get better for you.

[Jay Hinrichs]

Quote from @Todd Dexheimer:

Quote from @Bill Brandt:

Ins 2016 the median Vegas home was $219k. In 2020 it was $391k. In 4 years the prices went up 81%. Rents went up about 25-40% depending on the area. Housing prices and rent just aren’t as correlated as you think they are. 

When interest rates doubled in 12 months, buying became way more expensive, rents should have skyrocketed. We’ve just gone through 6 years where buying was cheaper than renting and people still rented. If prices drop 20% (I don’t think they will, too many people have locked in low interest debt.) the cost of buying would still be more than 2021 because of the interest rates. 

I’ve only been at this 25 years, but I’ve never seen a rent decrease. But I do agree if you are in a bad market you could get squeezed by people fleeing. But I think that will happen even if the economy takes off like a rocket. Landlords are fleeing local governments that hate them. Everyone else fleeing taxes/regulations/laws they don’t think improve their lives. Areas that Arjun by the government employees for the government employees. 

As a side note: I watched a video of cities that people were fleeing, almost all in the rust belt. Cincinnati, Pittsburgh, Detroit, Baltimore, Minneapolis, etc etc. Did you know that all 10 cities on the list had peak population in the 1950 census. They’ve all been slowing dying. 

 Most major metros saw rents decline during the great recession

As for the population decline in the midwest, you need to dive more into details. Yes, those cities peaked in the 1950's, but urban flight happened. The MSA increased in most cases, meaning the area is still growing. BTW, Cincinnati and Minneapolis are currently both growing cities. 

some markets saw rents to zero as in they could not find any tenants.. PHX was like this.. I had clients that had 4 plex's there and they went 100% vacant and they lost them to the bank. it happens .. dont think we are anywhere near that with this current market.

[Carlos Ptriawan]

Quote from @Jay Hinrichs:

Quote from @Todd Dexheimer:

Quote from @Bill Brandt:

Ins 2016 the median Vegas home was $219k. In 2020 it was $391k. In 4 years the prices went up 81%. Rents went up about 25-40% depending on the area. Housing prices and rent just aren’t as correlated as you think they are. 

When interest rates doubled in 12 months, buying became way more expensive, rents should have skyrocketed. We’ve just gone through 6 years where buying was cheaper than renting and people still rented. If prices drop 20% (I don’t think they will, too many people have locked in low interest debt.) the cost of buying would still be more than 2021 because of the interest rates. 

I’ve only been at this 25 years, but I’ve never seen a rent decrease. But I do agree if you are in a bad market you could get squeezed by people fleeing. But I think that will happen even if the economy takes off like a rocket. Landlords are fleeing local governments that hate them. Everyone else fleeing taxes/regulations/laws they don’t think improve their lives. Areas that Arjun by the government employees for the government employees. 

As a side note: I watched a video of cities that people were fleeing, almost all in the rust belt. Cincinnati, Pittsburgh, Detroit, Baltimore, Minneapolis, etc etc. Did you know that all 10 cities on the list had peak population in the 1950 census. They’ve all been slowing dying. 

 Most major metros saw rents decline during the great recession

As for the population decline in the midwest, you need to dive more into details. Yes, those cities peaked in the 1950's, but urban flight happened. The MSA increased in most cases, meaning the area is still growing. BTW, Cincinnati and Minneapolis are currently both growing cities. 

some markets saw rents to zero as in they could not find any tenants.. PHX was like this.. I had clients that had 4 plex's there and they went 100% vacant and they lost them to the bank. it happens .. dont think we are anywhere near that with this current market.

 is that problem occurred in that specific particular multifamily or every apartment in the area experienced the same ?

[John Morgan]

@Coe Davis

This is why I invest in C+ class SFR. They are in high demand in good times and extremely high demand in bad economic times.