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.