For GFC and other market crash veterans, signs to exit?

Question

Hi everyone. I wanted to pose a question to fellow investors who are veterans of the market crash of 2008 or Asian economic crisis, and other economic crashes in the last 20 years.

For those of you who are have experience with these crashes and are still investing in real estate, are there any tools, data sets or charts you're using to determine when is a good time to exit the market and sit on the sidelines with cash?

It's not that I'm predicting a crash anytime soon, but I was hoping to find some data to keep an eye on to know when to sit on the sidelines. right now, I'm using case shiller indexes of affordability, but was hoping to see if there were better indicators.

Thanks in advance.

Jay Hinrichs · Answer

@Bill Jacobsen   20% in the very competitive Willamette valley market is strong good job... And can vouch for rents here.. Not as strong as whats happening in the SF bay area but better than most places in the country. ( IE rents are paid and vacancy is an extreme rarity)

Just can't get those 2 to 3% rules those in the mid west preach about.

Bill Jacobsen · Answer

I project a profit of 20% on my money per flip and budget for 6 months. That is a total of 40% per year. If my cost is 70% of ARV that means my profit is 28% of ARV. Unless the housing goes down more than that in a year I still make money. On my rentals, I have never had to lower my rent. I was just able to buy new rentals at lower prices.

That was the long answer. The short answer is that I don't worry about GFC. I do worry about the IRS.

Have a Blessed day.

Bill

That was the long answer.  The short answer is that I don't worry about GFC.  I do worry about the IRS.

Have a Blessed day.

Bill

David Krulac · Answer

@CK Hwang

We don't move around from market to market, and we don't sit on the sidelines ever.  We do change what we do, the mix of what we do and the volume of what we do.  Besides rehabbing and flipping we also do holds and subdivision.  Some of our holds have been held for decades through up and down markets.  And subdivisions can take a long time to develop and get all approvals and years to sell out, so its hard to turn on a dime.  And we lived through the 1981 real estate recession when fixed 30 year mortgage rates hit 18%.  Try to fit that into your budget plan.  We've bought and sold property in every year since the 1980s, through good and bad markets.  We're always a buyer, even in 2008 and every other year.

I'm not a market timer moving in when the market is poised to rise and getting out when the market is set to plunge.  And I don't have a crystal ball to predict the future.  And while all real estate is local, national and global trends do affect the local markets are not isolated from the bigger world.

We always look to improve the composition of the portfolio and every year we look to jettison properties that are no longer performing or don't fit as well as they once did.  So every year we try to sell properties and replace them in the portfolio with properties better suited to out goals.

We always have property for sale and always have property for rent.  sometimes that will be adjusted depending on the market, maybe selling a long time rental, or renting a property that is slow to sell.  Flexibility and adaptability are keys to surviving no matter where the market goes.

Kyle Hipp · Answer

I firmly believe that the fundamental driver behind the "great recession" was over leveraged balance sheets in the household sector. This leverage levels have come down from their peaks but and still stabilised at relatively high levels, historically speaking. Everything hinged on housing prices which was driven up by household debt, then wall street further leveraged these securities thus building the house of cards that would fall when the linchpin of ever rising housing prices stopped.

Balance sheets of the household sector are still weak. US trade deficits are not hurting anything greater than in the past however the federap governmenthas been weaning off nneccessary support and it is putting increasing pressure on the household sector. The number one indicator of an impending pullback is that in december of 2013 the federal government ran a budget surplus. This sounds good, however with an understanding of the operational realities of our monetary system it shows that economic growth must be driven by household sector debt which is still tepid as folks either can't get credit or don't want it.

I will pick up a good deal if it comes my way but I will be focusing on solidifying my base for the next 12 - 14 months ready to spring into action from there.

J. Martin · Answer

Hi @CK

@CK Hwang undefined,

I wrote a blog post about the idea you are asking - when to get out or reduce leverage relative to the economic/real estate cycle.. It's more questions and considerations, and might interest you..

http://www.biggerpockets.com/blogs/4579/blog_posts/32645-if-ca-h-is-king-then-leverage-is-god---loans-cash-roe-roi-and-risk

There are a million indeces, but for real estate specifically, I think looking at affordability indeces, how loose loans are (either through Federal Reserve loan surveys, % of subprime or low-doc loans), and consistency of % real estate price gains far exceeding inflation for a sustained period, are all risks to look for..

Also, when you hear your dentist, then your mechanic, then your landscaper, then your landscaper's assistant buying up and preaching the wonders of real estate investments.. when it's the topic of conversation of every cocktail party.. and when it's the only asset class everyone wants to be in.. you know the market is getting frothy..!  It will be a little different every time, so I wouldn't just rely on traditional indeces.. But use it all together.. just IMHO.

Good luck!

Duncan Taylor · Answer

Watch copper demand.

As for what you should do, that is something you will have to decide.

All I can tell you is what I am doing. I am aggressively increasing our cash reserves.

Duncan Taylor · Answer

The stock market is oversold. That doesn't mean it won't be more oversold before it corrects.

The real estate correction did not complete in 2008/2009. Eventually it will. I think within the next two years.

Is it time to panic? Absolutely not.

Is it time to be smart? Yes!

We are increasing our cash position and taking profits on stocks and properties where it makes sense. We aren't panic selling, but we are selling to increase our cash.

In 2016 I believe we will be faced with the start of a prolonged buying opportunity we will never again see in my lifetime and possibly not in my grandkids lifetimes.

Jon Klaus · Answer

For income investors, when the yields are just too low to make sense any more, it might be time to get out. 5% yields when the cost of money is 5% or more?   I think I'd be selling.

Margo Roberts · Answer

That's a great question to ask, CK.  I know Sean O' Toole, attempts to predict market cycles with his research, however, he is the first to admit that no one knows what the market will be like in the future for sure.  He is hoping for a slow incline of prices, not the rapid course prices have been on. (I believe I am paraphrasing him correctly).

I am hoping the lending laws remain tight, as well, to keep the right people in as owners and the renter population stable.

Jay Hinrichs · Answer

@CK Hwang   I sold my Atlanta holdings last summer.  I entered the market in 2011  a year or 2 late unfortunately. and exited in 2013 with very tidy profits.

We bought courthouse steps and sold to hedge fund from Carmel IN.

We rehabbed and had them all tenanted were picky were we bought etc etc.

What I learned in the GFC  is to take profit when you can. we left meat on the bone for the next guy got great returns and rolled into the next market we like.

For GFC and other market crash veterans, signs to exit?

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