Posted about 1 year ago

Lessons from the 2007 Housing Crash, Just in Time for the Next One!

I did my first real estate deal in 1999. It was a 2-bedroom condo fix-and-flip in Smyrna, Georgia. By 2006, we'd built a portfolio of about 30 single-family properties, mostly lease-options, but with a few owner financed deals as well.

The Housing Crash of 2007, and the Great Recession that followed, hit our operation like a lead pipe to the skull.

By 2008, we'd witnessed the collapse of global powerhouses like Bear Stearns and Lehman Brothers, and the demise of major banks including Washington Mutual, Countrywide, and Wachovia. Mortgage lenders, panicked and desperate, filed 3.1 million foreclosures, resulting in over 860,000 families losing their homes. And that was all in just one year.

I'd never before experienced a downturn as a full-time real estate investor.

Here's what I wish I'd known.

Know The Time

In late 2006, we started having more tenant troubles than usual. Formerly solid payers were starting to get behind on rent. Residents were having their work hours cut or losing their jobs altogether. Something fundamental was changing deep within the U.S. economy, but at the time we didn't know what. 

Within a year, everyone knew.

Expansion. Peak. Recession. Trough. Welcome to the Business Cycle: The "good times" always lead to excess and incaution, which eventually leads to the "bad times" as asset values drop, which in time leads to renewed "good times" as bargains are snapped up, and round and round it goes.

So, given this, the Million-Dollar Question is always the same: Exactly WHERE in the Cycle are we right now?

The Bad News: I. Don't. Know. The Worse News is that nobody else does either!

It's up to each investor to do their own homework, put an ear to the ground, and talk to every one: buyers and sellers, landlords and tenants. It's why I spend so much of my day networking like a maniac.

Not ONE of us KNOWS the future, yet ALL of us CREATE it together, one day at a time.

In Atlanta, I believe we're in the Late-Late-Expansion phase of the Cycle. Buyers now greatly outnumber sellers. Most of the wholesale "deals" I am seeing marketed are laughably bad. More people are buying properties they shouldn't in the hope that the Wheel won't ever turn.

But it will; it always does, eventually.

If Cash is King, then Cash Flow is Emperor

In 2002, we were getting $1600/mo on a 4-bedroom rental in a nice part of West Cobb County, Georgia. In 2008, we were lucky to get $1100 on a similar property. When that happens, if your monthly cash flow isn't better than $500 (and ours definitely was not), you're going to be in a world of hurt. Now imagine holding a portfolio of 20-30 of these bloodsuckers. U-G-L-Y!

The way you survive a downturn is to maintain solid cash flow throughout. Cash flow is what keeps you from making bad decisions out of desperation.

So, what about cash? Isn't cash king? Sure, having cash is always nice, but only as a means to buy cheap cash flow. Having cash is a means to an end, not the end itself. If you're still holding a big bag of cash once the downturn is over, you missed your grand opportunity.

When the world turns upside down, only those who sustain positive cash flow will survive. And, those who can GROW it will really thrive.

Don't Fear the Reaper; Embrace the Carnage

We spent most of the Great Recession trying really hard not to die, financially.

Our total assets saw a 20-25% drop in value. Rents backed off as much as 30%. Life generally sucked. Seriously sucked.

But, while we were cowering in a bunker barely surviving the storm, others went on an epic acquisition spree that will probably not be rivaled in my lifetime. Hysterical sellers, banks and owner-occupants alike, abandoned properties for pennies on the dollar. Those who were stable enough to snag these deals made a fortune.

Now that I'm a survivor, I eagerly await the next downturn. I intend to be ready to pounce on some awesome opportunities. For us that means ditching marginal properties now and streamlining our financials to eliminate fat and inefficiency.

How are you preparing for the next phase of the Cycle? Please share your thoughts in the comment section below.

Comments (4)

  1. Mitch, what a great introspective article. Having survived this and learning what you have will certainly put you in the place you want to be when the next debt driven downturn occurs. And it will. Nobody know when as you stated, but the cycle has to be getting close. Many new investors are over leveraging themselves and will take a dive. It may not be anything they have done wrong, but the banks will be calling the shots then and stopping lines of credit, etc. The ones who are prepared with thrive as you mentioned. No matter what investments we have Low to No debt on them will make all the difference. 

    1. Thanks for reading, Scott! Here's to those of us who learned these lessons the hard way: We should all get t-shirts or something!

  2. This is a great post and great advise. My only fear is that folks won't heed the warning. My investing focuses solely in the self storage sector which is known to be buffered (at least to some degree) against cyclical changes in the market.  This is perhaps more true for me as I operate in secondary and tertiary markets that tend to roll a bit softer through the cycles. Even so, a good bit of my mental energy is geared toward structuring my investments to minimize downside.  When faced with a pending "correction", I place an even greater emphasis on mitigating risk, even if that means lopping off a bit of the back end potential. Thanks for the post Mitch!

    1. Mike, thank you for reading and for your thoughtful perspective! Yes, we have started looking at smaller markets beyond Metro Atlanta ourselves.

      I also think you've struck absolute gold with your self storage concept. We really need our operation to be more counter-cyclical. I intend to be joining the Storage Rebellion very very soon!