How to make money when the market declines?

Question

This is the question I have always asked myself:

Who makes money from a market crash? I guess the short answer is INVESTORS!

Okay. but as a newbie I want to prepare myself as well a possible. I want to be in a position to be able to gobble as much real estate as possible when the market declines.

What are your thoughts? Do you ever ask yourself this question as well?

What are you doing to put yourself at an advantage point?

Eric Bilderback · Answer

I think about this all the time.  I am always looking for something but it is harder and harder to find something that will match my criteria.  I do feel like a contraction is coming, however I remember thinking that in 04 and it took three more years.  So I might be waiting a while.  I also don't ever recall so many people waiting for a crash before.  I don't follow stocks, but I wonder if the real estate market will not fall that much because there are so many investor on the sidelines waiting to pounce as soon as they can find something that cashflows.

Ramin Y. · Answer

I love these responses. Thank you all for the advice. I specially enjoyed Comments from

@Ben Stoodley, @Ryland Taniguchi, and @David Thompson.

Ben Stoodley · Answer

Hey @Ramin Yesharim - it's all been said here before, but the idea is that you have to accumulate as much cash before the market crash and then buy as much when it does decline. Also, as time continues and you feel the decline is getting closer, definitely start lowering or paying off all leveraged properties. HML or any highly leveraged property are the ones that will be in trouble first when the market dips. If you can keep those to a minimum, that is ideal. I see more and more investors borrower at lower LTVs for this exact reason. Then, have a back up strategy to your back up strategy. Having a rental portfolio that is cash flowing in areas where rent will continue to be in demand is always a safe back up. Build cash, decrease leveraged properties, increase back up plans, have cash reserves for both acquisitions and payments during decline. Good luck!

Ryland Taniguchi · Answer

I think it might be harder for a newbie to invest for a market correction.

1) Strategy #1. Accumulate cash. Easier said than done for a newbie. My goal right now is to raise $200 million in capital in anticipation of a market correction. A smaller investor may accumulate their own cash. I feel that the loss in yield is hard to make-up sitting on the sidelines. While accumulating your cash can make a lot of sense, better if you can find a safe return that won't be effected by a market crash.

2) Strategy #2. Non-HML High Velocity. If you have your own cash, and can flip properties in 4 - 5 months that's great. Speaking for myself, SFR flips don't scale in this hot market because one at the size I am running at I have to get permits which cause 2-5 month delays and because it's almost impossible for me to find enough quality General Contractors to do multiple projects. I am underwriting hard money loans at 50% LTV and flipping the notes to credit union. I prefer what I am doing compared to what SFR flippers are doing and am probably getting higher returns with way way less risk.

When I see people's posts about flips, I literally cringe as they don't seem to comprehend the risks they are taking. If you borrow hard money, it will eat up 8% of ARV per six months. What happens to flippers when the market takes 18-months to 24-months to sell? Not to mention declines in market. At this point in the cycle, I think a lot of flippers will lose everything if they use hard money. When they are not using hard money, the yields are not worth the risk. I am sure flips would work better in other areas than mine but they don't make sense to me in this part of the market cycle.  I am getting 60%-95% IRR flipping 50% LTV notes with almost no risk.

David Faulkner · Answer

Flippers make money during a crash by buying at 60 cents on the dollar and selling at 80 cents on the dollar. Buy and hold make money by buying at 60 cents and cash flowing while waiting until recovery to 1.20 to either sell or cash out refinance. Both take advantage by having some funds available to invest. Both are insulated by buying at a discount so they can sell at a profit and not overleveraging so they can afford to hold through the dips if need be, and still make money if a dip doesn't occur ... plan A and plan B (or visa versa). Heads you win big, tails you win small, but the house always wins, and you're the house. If you can't stack the deck in your favor, then don't play the game.

David Thompson · Answer

Ramin,

Whatever niche you are working on, how are you becoming an expert at it?  Whatever your criteria is, review it and ensure its still valid.  I would not change it because its harder to find a deal but ask yourself am I willing to accept a lower return for the given risk (time, money, etc).  If not, is this the only niche that works now in this cycle?  Are there other niches (arrows I can add to my arsenal) when things are more difficult to find in the niche area you have already built confidence in?

The truly savvy real estate folks I know get really good at one area and can continue to stay true to their criteria, deals may take longer to find but they know how thru experience to make deals work when the average player in that space scratches their head.  It's almost easier for these folks at this stage because the novice or average players give up in frustration, hence, less competition.

As mentioned, I've seen this in MF large apartment investing.  Yes, getting harder to find value and get the returns expected at this stage, but experienced operators still find a way to add value.

You may want to ask yourself, is their more to learn to be an expert in my niche or if I don't have that passion or interest, is it time to go explore another niche that might be better for where the markets are now or headed?

Amit Kal · Answer

BTW, the Queens market continues to rise - pretty incredible

http://ny.curbed.com/2016/10/13/13257034/brooklyn-...

Amit Kal · Answer

I have been shifting to lower rent properties. Instead of buying another SFH for 150k, that would rent for $1550, I'm picking up a quadplex for $310k that rents out for $800 a door in the same hood that the $1550 SFH sits. There is always a market for $800 apartments, even during rougher times. This will hopefully provide some insulation during a pull back in the rental market.

Russell Brazil · Answer

Keep some money liquid so you can buy when prices go down.

However you won't be able to predict a coming decline, so don't try to. Everyone thinks they are Nostradamus after the last crash.

Oleg Shalumov · Answer

Ramin, why wouldn't it? The demand is always there as long as the economy in Tri-State area is going up. I see more businesses are currently looking for workers: that means that people will be moving into the area so that they can work in the City. And since rent in the City is going up like crazy, people are looking in the surrounding area (Brooklyn/Queens) and the rent is going there up as well.

Once the rent in the City will start going down, the surrounding area will go down as well. However, as I am monitoring the prices in NYC it is not going down at this point. Maybe someone who is working as an agent in NYC can comment on the prices.

How to make money when the market declines?

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