How to Win in Real Estate No Matter the Market—Up, Flat, or Down

by | BiggerPockets.com

Imagine that you have $100,000 in wealth that you are ready to invest in real estate. You have accumulated this $100,000 over the course of about 10 years, and it amounts to the sum total of your worldly wealth outside of your home equity and/or retirement accounts.

Ready for a bad plan?

Invest all of that money into a $400,000 property producing a modest cash flow in a solid location and resume saving at $10,000 per year.

Why is that a bad plan, in spite of you getting some cash flow and reasonable prospects? Well, it’s a bad plan because you only win if the market goes up. You’ll survive in a flat market. But you are up a creek without a paddle if the market goes south.

You can replace the phrase “accumulated this $100,000 over the course of about 10 years” with “inherited” or “won” or “came into.” The point is that it is quite perilous to invest an amount of wealth so large that you cannot rebuild it in a year or two all at once.

Contrast yourself to the guy that starts with nothing but sustains a savings rate of $25,000 per year. This guy can invest $20,000-$25,000 in an $80,000-$100,000 property each and every year. Or he can purchase a $200,000 property every two years. This guy isn’t screwed if the market goes down—he can buy more property for a better price in the event of a downturn! He has a system of wealth creation that will help him work through the next downturn, benefit from appreciation, and cash flow throughout.

The difference between these two cases is that the guy with the huge lump sum but slow accumulation rate is at the mercy of the market, while the market is at the mercy of the guy who is sustaining a strong accumulation rate.

As usual, this article is written for the full-time earner that makes their living in something besides real estate but is looking to build wealth semi-passively or passively through real estate on the side. The full-time real estate entrepreneur might approach their strategy completely differently and be correct in doing so.

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How to Win in an Up Market

Fundamental to your decision to invest should be the assumption that your property value and/or rents will increase with or in excess of inflation. I’d argue that if you do not believe your property will increase in value at least at the rate of inflation over a long time period that your money would be better invested elsewhere.

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

Why would you invest in something that you thought was going to decrease in value over time?

Assuming that you agree with this premise, you know then that you must be invested in real estate in order to benefit from market appreciation or even just good old inflation. You lose if the market appreciates and you own nothing, as you could have made money by owning property.

OK, so that’s how you win in an up market. Makes sense—this should be obvious information. Benefit from appreciation, and benefit from the increase in cash flow that comes with rising rents.

How to Win in a Flat Market

There are many markets around the country that remain relatively flat over the years. Many Midwestern towns, for example, experience little to no appreciation over long time periods, and rents and home values increase at or at a slower rate than the pace of national inflation over time.

Still, the owners of property in a flat market can win if they are able to generate significant cash flow from their investments. If you can generate a 8-12% cash-on-cash return (after accounting for ALL operating, financing, and CapEx expenses!) on your investment AND pay down the mortgage, you’re probably going to do alright, even if you don’t experience a bit of appreciation. At the end of 15 or 30 years, you’ll be left with a fully paid-off rental that can generate a substantial investment, and that rental will have been paid for with other people’s money (the tenants’ money).

Again, you can’t win in a flat market if you don’t invest, so staying out of the game is not an option here.

How to Win in a Down Market

This is the part I’m sure you’ve been waiting for. Keep in mind that I have NOT yet survived a market downturn, so this is purely my philosophy. I hope that you see the merits of this approach and are able to parallel it in your own investing life.

I believe that the way to thrive (not just survive) in a down market is to be prepared to buy more real estate. See, in a down market, you will likely be able to purchase more property with fewer dollars and likely generate more rent per dollar invested than in a booming market.

There are two ways to put yourself in position to purchase more real estate.

First, your purchasing power is dictated by your personal financial position—the holistic position that you maintain across your other assets, the income from your job, and your cash position. If you are able to save thousands of dollars per month and have tens of thousands (or hundreds of thousands) of dollars in wealth outside of your current real estate investments, you are likely to be setting yourself up in a strong position in the event of a market downturn.

Second, your purchasing power is dictated by your reputation. If you are known as the real estate expert in your circle, among your friends, family, and colleagues, you stand a good shot at being able to raise money in the event of a market crash. Notice that you cannot develop a reputation in real estate if you do not own any property. I am not going to give someone tens of thousands, hundreds of thousands, or millions of dollars to invest in real estate if they have never owned property before!

I believe that all of this stuff is interrelated. I believe that if you want to be successful in real estate investing over the long-term, regardless of whether you think that the market is going to go up, down, or sideways, you must first buy property, manage your property conservatively and reasonably, maintain a strong holistic financial position, and network to consistently build your reputation.

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This is how I manage my business and my life. I keep a large cash reserve, work hard to make sure that I am able to earn a steady income, spend as little as necessary to live a happy lifestyle, and gather as many intelligent perspectives about real estate investing as I possibly can.

My properties will provide economic benefit to me in the form of cash flow and loan amortization in a flat market, will continue to offer me a shot at appreciation, and are training me to take advantage of the next market crash.

In the event of a market downturn, I plan to purchase exponentially more property by harnessing my personal financial position. And should I deem the situation to be appropriate, I will attempt to use my reputation amongst my friends, family, colleagues, and elsewhere to attempt to raise capital to buy as much property at an excellent price as I can.

Notice that I am not investing, at the moment, more than about one to two years of wealth accumulation at a time. I believe doing otherwise needlessly exposes me to the market and that I will be dependent on my first or next investment going well.

My fate would be outside of my control.

Related: How to Survive in All Market Phases (It’s About More Than Just Ensuring Cash Flow)

Maintaining a Strong Financial Position

I choose instead to take a slightly longer but more steady approach toward early significant wealth through real estate investing, and I believe that I will continue to reap the rewards of this strategy regardless of what the future may bring.

Notice that most of the approach here comes down to your position outside of real estate. I believe that the majority of real estate investors out there invest in real estate part-time, on the side, while working full-time jobs. If that’s you, then your success through your first 5-7 years of real estate investing is likely to be just as impacted by how you run your finances across your entire life as it is by the properties you buy and how you manage them. Are you able to sustain a strong financial position outside of real estate investing during the initial years of portfolio building? If so, you may find real estate to be slow, steady, and rewarding. If not, you may find yourself on a roller coaster ride. Let’s just hope that you don’t run out of track.

Looking to set yourself up for life as early as possible and enjoy time on your terms? Scott Trench’s new book Set for Life can be ordered on Amazon, Barnes & Noble, and at other fine booksellers! Whether you’d like to “retire” from wage-paying work, become less dependent on your demanding nine-to-five, or simply spend time doing what you love, Set for Life will give you a plan to get there. This isn’t about saving up a nest egg. It’s not about setting aside money for a “rainy day.” Set for Life is an actionable guide that helps readers build the accessible wealth they need to achieve early financial freedom.

Do you have a plan to win if the market goes down? Or do you only win if the market stays flat or goes up?

Let us know in the comments below!

About Author

Scott Trench

VP of Operations at BiggerPockets.com, Scott is also a licensed real estate broker/agent, real estate investor managing 8 units in Denver, CO with a partner, a house-hacker, and personal finance nerd. His book, "Set for Life" (published through BiggerPockets Publishing) thoroughly details a step-by-step journey to early financial freedom for full-time workers earning median incomes and starting with little or negative net worth. When he's not helping full-time workers move toward early financial freedom, the 26-year-old can be found playing rugby, biking, or skiing.

21 Comments

  1. Elliott Russell

    Not sure I am totally following.
    Market 1: Is up and keeps going up (you buy and gain with appreciation)
    Market 2: Is sideways (flat–you buy and gain with cashflow)
    Market 3: Is already down…(you buy on sale, dollar cost averaging. Assuming you do not owe more on your current properties than they are worth)

    What about market 4?
    Market is up (you buy) and moves down? (Now you owe more than it is worth … or at least have a major dent in your equity position.) This limits you ability to buy another home when lenders are already cautious with a market downturn.

    Any thoughts on this market? I am assuming the solution is to wait until there is a recovery and ensuring you are not in a position that would have caused you to lose your current assets. Ways of doing this would be increased equity positions, reserved funds, locked in mortgages.

    I am a noobie when it comes to real estate–hence the question 😀

    • Scott Trench

      No – the market is where it is today. There are only three possibilities for tomorrow:

      Up, down, sideways.

      My strategy is to buy in today’s current market and win in all three possible scenarios for tomorrow. If the market goes down, then yes, I may owe more than properties are worth, but I also have plenty of cash and a strong financial position that I have worked hard on and continue to plan to work hard on to allow me to purchase more property at a lower price. My holistic portfolio will be positive, even though some of the properties bought right before a down turn will be underwater.

      The solution is NOT to wait for recovery in a down market! The solution is to be consistent and steady, work hard, and build your reputation so that you can take advantage of a buyer’s market if and when it comes back around. Absolutely, you should be maintaining a strong holistic position with excellent cash flowing properties to ensure that you make it through a down turn.

  2. George Lui

    Thanx for the article. Though I do have the cash reserves, I, too, am planning for the market downturn which I believe is 1 – 2 years away. Like your article states, I’m taking steps to put myself in the best financial situation when/if that happens.

  3. John Murray

    I have been in this game since 1985. The 1980s ushered in the age of greed and the New Deal was over. It is easier to gain wealth since the tax changes of 1986. Post WW2 was a time of the working people to live well and retire with relative comfort. That all changed in the 1980s. Since then an investor that pays attention to recent history can just about predict when financial cycles will occur. When our government begins to change monetary policies that is when a change occurs and ushers in a new cycle. In 2005 I dumped all my real estate and braced for the crap storm and stayed cash rich. I did lose 30% of my equities.

    • Joe Howell

      John, Would you suggest selling now, taking the 25% tax hit and holding the cash for a few years until the Market corrects?
      I’m in the MidWest, and don’t know if a correction here would lower my value more than 25%. If that’s the case, would it make more sense to hold, building up cash reserves, then selling AND buying when the bottom hits?
      Thanks for the advice!

      • Giovanni Isaksen

        @Joe I think one of the advantages of owning in the MidWest is that properties aren’t subjected to the big swings that happen on the coasts. If the tax bite from selling is 25% and properties in your market haven’t dropped that same amount in previous downturns why take a 25% guaranteed hit?

        The other thing is that no one knows when or how deep the next downturn is. Are we closer to the next one than a year or two ago? Yes but that’s just a function of the unidirectionality of time and the cyclical nature of real estate. What if the downturn is five or ten years from now and you’re sitting in cash the whole time waiting for that perfect moment to re-enter the market? And you took a 25% hit to get to cash?

  4. nathan diones

    Scott,

    Very realistic advice and well needed article especially for today’s market. Myself and my partner’s do practice the same principles whether we’re in an upmarket, lateral Market or down Market. If you have a long-term position in real estate and consistently receive a great cash flow from the property along with principal pay down, the value of the asset or the dent in the equity doesn’t necessarily matter provided that your exit strategy is timed well with your goals and an upmarket.

    Given this market is probably going to reset in the next 18 – 24 months (personal opinion), we are now going into every deal we are buying right now anticipating the market is going to crash and burn within 6 months. If we can still sustain a positive cash flow, 10%-13% COC and a high ROI with the market crashing then we are moving forward with purchases. That is even after we anticipate rents adjusting downward and a 10 to 20 year holding period. All the best.

  5. Jahan Habib

    Great article, Scott. Just started reading the your ‘Set for Life’ book.

    I do have a few questions regarding the article:

    1. I see that you mention that you keep a cash reserve: Is this split between ‘buying a new property’ fund and excess cash flow from the existing investments? I am asking because I would like to know how you are preparing for a downturn (how money months of mortgage payments, property related expenses you have in the bank)?

    2. What role (if any) does property appreciation/equity increases play in expanding the RE. Is it worth accumulating a few properties and down the road (say 5-7 years) pulling cash out to buy even more properties? Or stay the course towards mortgage debt elimination?

    Appreciate your thoughts.

    Jahan

  6. Katie Rogers

    “Notice that I am not investing, at the moment, more than about one to two years of wealth accumulation at a time. I believe doing otherwise needlessly exposes me to the market and that I will be dependent on my first or next investment going well.”

    Great principle in theory, but in my market, totally impractical. The median local income here is about the same as the US median, BUT the median sales price is about $850,000. Even at the recent bottom, there was no way that one or two years of wealth accumulation was going to get you a property whose cash flow will break even. The cheapest fixer at that time was a 1/1 with no parking that sold for $300,000.

  7. Garrett May

    Hello Scott,

    I just purchased the e-book version of your book about a week ago. Excellent read with valuable information. I was wondering whether or not you have an electronic copy of the Appendix notes because I had trouble viewing them on my Kindle?

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