Yes, I’m Afraid of a Real Estate Bubble—But I Continue to Invest Anyway. Here’s Why.

by | BiggerPockets.com

Over the past five or six years, I’ve heard the following claim consistently made by investors both in my home market of Denver and nationwide. It seems by far to have been (and continues to be) the most popular prediction made by investors both experienced and novice:

“The market is probably going to [reset/correct/crash/fall/decline/etc.] over the next 18-24 months.” 

It seems like pundits have predicted a price squeeze or bubble that was two years out on average every single year out of the last five. Don’t believe me? Check out article after article from basically every major media outlet in the United States predicting a bubble at some point in the last six years. I’ve even compiled a sampling for your reading pleasure below:

2013:

2014:

2015:

2016:

2017:

2018:

I could go on.

How Long Are You Willing to Wait for the Impending Market Crash?

If you believe that a market crash is coming, you are either right—or else you might be waiting a long time to get started in real estate investing. There were people waiting for the next crash in 2013, 2014, 2015, 2016, 2017, and still here in 2018. Oh, and of course, there were just as many equally well-written and well-researched opinions talking about the great health and future growth of the housing market, which also continues today.

But the point is that I’ve heard about an impending market crash throughout my (admittedly short) entire investing career.

Let me ask you this: When the next crash comes, will prices drop below 2013 levels? Below 2015 levels? Below 2017 levels? How much do those waiting for the crash stand to gain by waiting this thing out, and how much will those who own property today lose?

How low do prices have to go to eliminate the gains of the last six years here in Denver? How about your city?

These pundits—I don’t believe that they are any smarter or stupider than you or me. The thing is, I don’t think anybody knows when the market is going to crash. Nobody knows if that will happen this year, next year, the year after, in five years, or in 20.

housing-market

To be clear, I’m not saying that I think the market will continue to go up forever. And the truth is, I’m scared. I’m afraid of two things:

  1. I’m afraid that the market will crash and that I will lose a ton of equity very quickly.
  2. I’m afraid that the market will climb much higher and that I will miss the ride if I don’t buy more.

I’m equally afraid of both of these things!

I’m sure that if you have an opinion on the market over the short to medium term (2-5 years) future, you have great reasons. I bet you have a bunch of charts, just like those pundits. I’ll bet that you can cite numbers that talk about supply, demand, interest rates, leverage ratios, employment, household income, the stock market, inflation, the trends of the Millennials, the trends of the Baby Boomers, or something else that’s just as important as all of the above.

But I’ll also bet that the fellow who is just as smart as you, but has the exact opposite opinion, has strong data behind his beliefs as well.

The fact of the matter is that if you believe that the market is going to crash, then you could be right! You could also be wrong! Or (and in my opinion the worst and saddest waste of being able to say “I told you so!”) you could be right and still lose.

The thing is that you don’t know which of those metrics and factors will be the lever that actually moves the housing market over the next few years.

As I hope I’ve demonstrated with the news articles above (and I can anecdotally tell you that I’ve been part of discussions on BiggerPockets about this very topic since 2014), we hear this song and dance about impending crashes all the time as real estate investors.

It scared me when I was thinking about starting to invest in 2013, and it scared me in 2014 when I bought my first property. It scared me in 2015 as I held that first property, and it scared me in 2016 when I bought again. It scared me in 2017 as I held those two and bought a third. It scares me now in 2018 as I plan to buy another property.

One day, the doomsday prophecies WILL come true. These pundits (and you, if you agree that we are headed for a correction) will be proven right eventually. But will that be this year? Next year? Five years? What if the correction comes in seven years? What if every metric that you can conceive of screams, “BUBBLE!” and still prices climb? What if the bottom of the correction sees real estate prices and rents that are much higher than today’s?

Those sitting out will be right, and they will still lose.

Related: 3 Reasons I’m Still a Buyer in Today’s Real Estate Market

THAT is why I continue to invest—even though I, too, fear a bubble. I believe that over a long time horizon, say 20 or 30 years, that prices in my market will appreciate at a rate equal to or greater than inflation. I believe that this will be the case regardless of whether I buy at the top or the bottom of the market today. And I believe that so long as I can ride the tides of market volatility and sustain possible cash flow, that I will not regret my decisions over time.

I also believe that I am incapable of accurately predicting when the market will boom and bust.

I could be wrong on these beliefs, and I constantly reassess the foundation upon which I construct my investing philosophy. But this is my philosophy and approach for now—and the one I have acted on and plan to continue acting on until I find something better.

Given my overall take on investing, I believe that I can maintain a system of investing such that I give myself reasonable odds of winning financially in all three market scenarios:

  • I win if the market goes up. If you don’t own real estate, you lose if the market continues to appreciate.
  • I win if the market goes sideways. My portfolio cash flows and I self-manage to ensure as much profitability as possible if rents do not go up at all.
  • I win if the market goes down. I believe you have a reasonable chance at winning if the market goes down if the following are true:

A: You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent.

This means a substantial cash cushion and substantial cash flow from existing properties. And I have no doubt that a sudden drop in equity will be hard. I try as best I can to mentally prepare for that ride and to learn from folks who have been through the 2007 recession.

B: You have the reputation to convince lenders and potentially other investors to invest alongside you when/if bargains do begin popping up.

Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone in a recession or depression who has no experience, who owns no rental properties, yet who tries to convince me that they’ve known all along that the crash was coming. I am instead going to look for someone with years of experience and the confidence to say, “Sure, I’ve lost some equity, but I couldn’t care less! Every month, I achieve a 10%+ cash on cash return, and I’m foaming at the mouth to buy as much as I can now that I see 20%+ cash on cash returns everywhere!”

No one can predict when the market crash will happen, how severe it will be, or what its effects will be. For all we know, all the metrics might point to oversupply and overpricing of U.S. housing, yet prices still rise over the next few years due to unprecedented inflation after over a decade of the Federal Reserve pumping trillions of dollars into the economy and/or a relaxed fractional reserve ratio (increasing the money supply and perhaps spurring inflation). If that’s the cause of the next great economic challenge of the United States, then investors will see prices and rents rise!

To be clear, I am not predicting this or any event. I’m just pointing out that this is one of many possibilities that could negate the effects of other market conditions and throw off the predictions of even the best pundits.

Why I’m Not Investing Aggressively

Now, all this said, I CERTAINLY do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation, and spend extremely little on my lifestyle. I maintain a high savings rate and have stashed away a large cash reserve. I also own a stock portfolio.

I do this because, just in case the pundits ARE right this time (and we are certainly five to six years closer to the next correction than we were in 2013!), I do not want to be caught with my pants down.

Related: 3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market

But I am not staying out of the market entirely and plan to buy another solid cash flowing rental property here in Denver again in 2018 to maintain my system of dollar cost averaging, regardless of the market conditions.

I’m doing this because I believe the best policy is to adopt a conservative, winning formula and to apply it consistently. And that is what I’ve done and plan to continue doing.

I do not believe that continuing to buy is any riskier for me than staying out of the market is.

Conclusion

Should you wait for the next market crash? I don’t know. Someday, the pundits will be right. I’ve shared what I’m doing and why, and I hope that perspective gives you something to think about.

I’ll caution you, though. I think, personally, that it is unwise to invest a large, lump sum of money all at once in a real estate investment. And when I say large, I mean an amount that is more than one to three years of savings, given your current financial position. If you do this, it means that you might be investing in a manner that is unsustainable for you. And if you are investing unsustainably, you risk losing a huge chunk of savings, perhaps all of your investment and then some, all in one go. I believe my system has a good chance of working for me because I believe that I have an excellent probability of being able to buy similarly sized or larger properties year in and year out in my market and sustain a system of dollar cost averaging.

If I wasn’t able to do that, I’d be finding another market to invest in, developing another investment philosophy, or working on my personal financial position outside of real estate to the point where I thought I could sustain my approach in an up, down, or sideways market.

Are you investing in today’s market? Why or why not?

Let’s discuss. Comment 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.

64 Comments

  1. Jeff White

    Nice article Scott, very timely considering all the experts again predicting the housing market won’t continue to go up and up, especially as mortgage rates have been increasing. Investors like to freak out, but for good reason because of what happened in 2008.

    I can speak from personal experience, I bought an out of state investment property at the peak in 2006, and I had to hold onto it for many years because I had negative equity. Luckily, it was rented out the whole time in a B neighborhood, and I had W2 job, ao I could pay the mortgage if needed.

    If I was trying to flip it or sell it quickly, I would have lost lots of money and been really hurt financially.

    I held onto that property for 11 years, but I finally sold out and made a profit. Lessons learned were immense: you can win if you hold the property long-term, you can survive a recession if you can still cash flow at lower rents, and you need a good property manager or be a GREAT property manager yourself to keep vacancy low.

    I respect your philosophy and strategy and I’m implementing something similar also in Denver because it is the best city!! Keep up the great work and congrats on the new podcast!

  2. Andrew Syrios

    There will be a correction sooner or later, but I thought it was around the corner well over a year ago, so it’s a good thing I didn’t stop buying. Buying cash flow properties with equity insulates you from corrections. As you said, it’s all about dollar cost averaging!

    • Scott Trench

      Thanks Andrew! I know that with a business the size of yours, that this problem must be 10 or 100X more frightening for you than for me! But, you guys have a super long term focus that will create sustainable wealth for generations. We all have a lot to learn from you!

  3. Darin Anderson

    A housing CRASH is not likely to be on the foreseeable horizon.

    The crash of 2008 caught many off guard because house prices had effectively not really gone down to any measurable degree since WWII. That’s a very long track record. But as we all know past results are no guarantee of future returns. What was different in 2008 was that lending criteria became relaxed to a level not seen since WWII. We had all heard of NINJA loans, no-doc loans, have a pulse loans, etc. This allowed artificial demand to come in that had never before been in the housing market.

    In addition there were negative equity loans, even up to 125% LTV loans, negative amortization loans, nothing down investor loans, interest only loans, and a vast expansion of sub-prime loans. All of it bundled and securitized into MBS products, derivatives, and credit default swaps until what was actually in the investment bundles was so obscured that no one could accurately judge its risk or value. But Moody’s and S&P slapped AAA ratings on the junk and it sold like crazy so the lenders wrote more of those products each week than the week before.

    New first time home buyers came out of the wood work. Investors came out of the wood work too. But not to rent, or fix and flip, or any actual investor type activity. Just to sit on the property for 6 months and sell it at a big mark up and then repeat the process.

    Meanwhile during most of the decade of the 2000s we over built houses from the historical average of 1 million units per year starting with 1.2-1.4 million or so units in the early 2000s and peaking at nearly 2 million units per year or 1 million units over the long term average in 2006. We had never in history built that many units in a year.

    The result was classic economic theory. Artificial demand drove up price in an ever expanding cycle. The rapidly expanding prices brought in new supply until the market was so overbuilt that there was no one left to sell the houses to that everyone was just sitting on waiting to flip. And that’s how it ends. Kaboom!

    There is literally not even a single one of those elements that is present in the current housing market and some elements that are the exact opposite.

    1. Ninja, no-doc, pulse loans are no where.
    2. Negative equity loans, negative amortization loans, nothing down investor loans are not to be found.
    3. Interest only loans and sub-prime loans have returned to normal levels or even below. They are an extremely small sub-set of the market.
    4. Because of all this lenders are still more restrictive in lending funds than they have been at any time in the decade before the crash. They are more lose than they were in 2010 but that is not saying much. They are still tighter than average.
    5. Because of this demand is not running rampant. It is growing and still increasing but all that is happening is that the new demand is getting very frustrated because of reason #6.
    6. Supply of houses for sale is lower than it has been in decades. Existing houses are not being offered for sale so that months of supply is down to around 3-4 months. Anything below 6 months is considered healthy. At the peak in 2006 supply was at 12 months.
    7. And most importantly, supply of new units coming into the market is still far below historical averages of 1 million units per year. It bottomed around 300K units per year in 2009 or 2010 and is only this year jumped back above 600K units per year. We have to get back to 1 million units per year just to be on par with the historical average. And when we finally do get there we will have over a decade of a building deficit to work off. Granted we had oversupply to work off in the first few years of the crash but we have now under built houses to the tune of twice as many as we overbuilt them during the 2000s.

    Given all that, it is very difficult to make any kind of case for a market crash. Could the economy go into recession, demand diminish, bankers get even tighter and prices go down. Yes it could. But given that this market is under supplied and demand is still being held back it is unlikely that any downturn will result in large drops in price. The economics of what creates a crash just aren’t there and there is no way to get them there for many years to come.

    The direction of the housing market is likely higher from here. That doesn’t mean it is a straight line or that it can’t pause or pull back at any given time. It certainly can. But any significant pull back that would be worth waiting for needs elements of supply demand imbalance. There are no such elements in this current housing market and thus there is no catalyst for any sizable crash.

    Odds are that the opportunities to enter the housing market will get worse not better.

    I am talking about the housing market as a whole and mostly 1-4 unit properties, not the apartment segment of that market. Apartments have been overbuilt in the last few years. That is starting to peak and slow down now but they have still brought many units on the market. That is part of the housing supply which is still undersupplied as a whole but the percentage that is shifting to apartments has increased do to apartments being built at a rate higher than at any time in the last few decades. Due to higher rents (since people are having a hard time finding a house and qualifying for loans) renter demand and prices are up and cap rates are way down. That sub-market in housing has some of the characterstics of over demand and over supply that can lead to more significant corrections. I have no idea if one is imminent, but those conditions would give me slightly more pause there.

    All real estate is local and this analysis is national. Any given local market could have its own characteristics that could lead to a local crash. I have no insight or knowledge about any given local markets

  4. Rob Cook

    Scott, a remarkable perspective for someone of such a youthful age. Impressive. I think the main takeaway is, stay scared. Always. It is what keeps egos and stupid exuberance in check, protecting your finances.

    At 59, I have seen a lot of cycles in the real estate markets, and also in the stock market. I recommend selling out of your stocks, by the way.

    I consider rental real estate, a business, not an investment. So it is consistent with your thinking, to take a long-term, ride it out approach. Trying to time markets, whether in stock or in real estate, is a loser’s game. Having the capability to ride out turbulence is key. Sounds like you are not over-leveraged or unrealistically expectant. Good for you. Stay that way. Keep your feet under you and don’t stretch yourself too thin. No reason to get greedy or in a rush, that is what usually is the downfall of many. Think long term. If all you do is barely break even cash flow on rentals, in 20 years you will still be rich. IF you hang in the game.

    I have made over $5 Million in real estate, part-time, by just plodding along at it for 20 years, cautious and slow, buying and holding. A few of my deals have paid off dozens of others! Lucky, whatever. Who cares. Time is on our side in rentals.

    If you count on appreciation, you are gambling. If you invest conservatively and run a rental business, for the long term, I do not think you can really lose. You may not win as big and spectacularly as speculators, but it is a “get rich for sure” gameplan!

    Proud of you Scott.

    • Darin Anderson

      Rob,

      Good perspective.

      Curious these two statements in close proximity to each other though:

      “I recommend selling out of your stocks, by the way.”
      “Trying to time markets, whether in stock or in real estate, is a loser’s game.”

      ???

      • Rob Cook

        Darin, I understand your point. Without reliance on “overbought” indicators, etc. I just have a deep-seated distrust of the equity markets, based on my very limited experience as a hedge fund trader on the street. Lost as much in the stock market as I have made in Real Estate. Never lost a dime in real estate, not even a single bad deal out of hundreds. So that is where my “gut feeling” statement comes from. You were sharp to note the inconsistency though!

        • Darin Anderson

          No problem. I get it. Your reply seem to indicate your position is more a preference for real estate over stocks rather than a timing statement. I have some of both but also have done considerably better with the real estate as it holds opportunities for higher and more consistent returns.

    • Scott Trench

      Thank you so much Rob! This is the plan – to attempt to cash flow AND benefit from appreciation and long-term equity creation, but in the worst case break even, even through some tough times, and eventually have a good position if by nothing else, simply through loan amortization.

      There’s always somebody getting rich faster than you. I’m fine with that, and I believe that in the end, I will look back happy with my decisions overall.

  5. Walter Milam

    If you do your homework and your numbers make sense for a rental, accounting for repairs, it doesn’t matter what the market does. Buy something with good numbers and you will never lose. You might lose equity yes, but it doesn’t matter until you sell the property! Now is a great time to sell and I am finding it harder and harder to NOT go after the quick cash now because that quick cash amount continues to climb higher and higher!!

    • Rob Cook

      Walter, I agree completely. I am actually going to sell one of my rentals, a SFD I had since 2000. Simply because it is such a great market to sell into at this moment in time. The equity can pay off a dozen of my other rentals, so it is hard to not do. However, I am becoming a little more risk-averse, and in a little more of a harvesting mode at my age now. Sometimes you just have to know when to cash in your chips, even if only a little at a time. Bought that one for $167K, owner financing, and it should sell easily for over $650K now, and we have not had a single day of vacancy on it in 17 years! So time to “pick” that cherry and go forward less leveraged on the others for me.

    • Scott Trench

      I think this is a great move! Now is definitely a good time, if you already have a portfolio, to shore up weaknesses in the financial picture and sell off assets that you don’t think are a necessary or additive part of your long-term plan!

  6. Rob Cook

    “No problem. I get it. Your reply seems to indicate your position is more a preference for real estate over stocks rather than a timing statement. I have some of both but also have done considerably better with the real estate as it holds opportunities for higher and more consistent returns.” Darin Anderson
    ( I don’t know how to quote on this forum LOL!).

    Exactly Darin. My comments were not really internally inconsistent. I was not saying the timing of the stock market, suggests selling now. I was saying, the risks at this level in equities, definitely seem to outweigh the upside, but that aside, I strongly prefer real estate as a place to put my money. Being a businessman, I like having direct control over my investments.

  7. Well said, Scott! You’ve identified a trend that seems to apply to virtually every topic in the media these days: doom and gloom is more likely to motivate clicks & elicit strong opinions. That, in a sense, is what keeps major outlets in business these days.

    BUT those serious about investing should not be beholden to these trends, even if they end up being accurate every once in a while. It’s like saying “winter is coming” … inevitably, that statement is correct. Thank you for being a voice of reason here. You also make good points about what to do to put oneself in a position to weather “winter”, when/ if it ever gets here. Great post!

  8. Bo Kim

    Nice article Scott.

    Just curious – In your experience, what is a healthy reserve per rental?

    I expect to have 3 rentals in the 60-80K price range, but not sure how much reserves I should have on top of the 8% vacancy, 8% maintenance I am keeping per month before moving to the next purchase.

    Thanks!
    Bo

  9. Darren Sager

    Good read Scott! NJ largest appraisal company, Otteau Evaluation Group, says we’re in a housing shortage here in northern NJ and we’re looking at this continuing at a minimum through 2021. Jeff Otteau, who founded the company said he’s never seen it as tight as a market as we’re having right now. I was expecting them to say the bubble is going to burst too but I guess not.

  10. Abel T.

    100% agree with this article, and how pointless it is to make investment decisions just based on peoples views of where we are in a market cycle.

    I’ve never been through a crash (surprisingly Lehman wasn’t a popular topic at college parties), but it seems like the best way to approach investing, whether the market is hot or slow, is to (i) have strict, conservative requirements for what you are willing to buy, (ii) invest for the long term and (iii) always maintain backup sources of cash flow and reserves (your job + savings is an example, your high interest line of credit is not).

    For instance, if you insist on buy and hold deals that yield 12%+ CoC (after reserves), 60-70% LTV, and are located in solid markets, don’t start buying 4% CoC deals because it’s tough to find anything better in your market and all your other friends are buying. And don’t buy 15% CoC deals that are located in terrible areas just because the yield is high. And don’t sit at home cradling your cash because you’re sure this time the market will fall. Just constantly work hard and get creative in order to find that solid deal which meets all your requirements.

    I looked at a ton of deals before buying one in Jan, and I’ll absolutely buy the next one I find which fits in my box. I won’t however, buy a deal because it’s marginally better than the last 5 deals I looked at, and I won’t sit at home with Netflix and pizza because investing today is hard (as tempting as that seems..)

  11. A bubble occurs when the voice in your head screams buy and bottoms out when that same voice says sell. That’s always been my finding been tracking different markets since 1992.

  12. chad nagel

    What do you consider aggressive investing?
    From what I heard on your podcast, you Own 2 properties and a JV on a 3rd. Or have you bought more since episode one of the BP money episode?
    With 3 deals how have you build those relationships at your bank?
    How would you consider the cashflow numbers for that podcast to be stable?
    It would appear without your job at BP you would have a tough time living without trying to be EXTREMELY frugal in every aspect of your life, hence the new podcast.
    Only take financial advice from someone you would switch places with…..
    Scott I would not switch places with you…..

    • Dan Heuschele

      I think this was unnecessarily harsh as everyone starts somewhere.

      I do not adhere to the opinion to only take advice from someone I would switch places with. I like to believe that I listen to all views and evaluate what I think of the view. Part of this evaluation may include the success of the individual but that is not the only criteria.

      Is his view not correct because he is starting out? Because he has not invested through a significant RE decline? Because he is young?

      Scott’s view on this matter exactly matches my own but he expresses it much more elegantly than I could.

      If you do not agree with the view then state why but there is no need to attack the experience of the person expressing the view especially in this case where he is pretty open about not having invested in RE very long or having a lot of units.

      • Christy Browning

        I agree, Dan! Everyone does start somewhere, including myself. I am a new real estate investor and currently have one property (SFH rental) that is rented and going smoothly. I appreciate Scott’s advice and strategy – using this strategy will help whenever the market does go south.

        Great article, Scott! Also – I was so excited to hear your and Mindy’s interview with Mr. Money Mustache! Congrats on your new podcast!

    • Scott Trench

      Pow! Right in the Gizzer. Tough Love Chad, but I appreciate it. I’ve got plenty of work to continue doing to prepare for a market down turn. But I believe that I am doing as much as I reasonably can to set myself up for opportunity and success as time progresses. I think we might all benefit from your perspective in an article soon as someone much more experienced than I!

      What else should I be doing and where does my approach have weaknesses that I can address?

  13. David Oldenburg

    I agree with both the market will eventually correct, and I am continuing to invest. As a flipper and wholesaler, I am in properties short-term, and I am buying at deep discounts. If the market drops, I could lose some money, but eventually you are up so far on your investments it does not matter. For me, the key is not to use much leverage. It was over-leveraging that crushed so many of my friends in 2006 and beyond. I now pay cash for my flips, only flip 1 or 2 at a time, and get in and out quickly.

    • Scott Trench

      Thanks for the thoughts David! It makes sense to me that if you don’t over-leverage and take as many reasonable steps as you can to increase the efficiency with which you run your business that you have great long-term odds of success here.

  14. Wenda Kennedy JD

    Over the years, I’ve seen cycle after cycle. The guys who really lost their shirts, were the guys who drank the prevailing Kool-aid — and believed their own press. The author is right in his assessment. Staying out of the RE market gives you a 100% chance of failing. Being over leveraged is an equally powerful formula, where you will crash and burn. I too believe in a well planned investment program, that walks the middle of the road.

  15. Susan Maneck

    I bought two properties in 2016, a condo in California and two houses on a single lot in Mississippi, but I haven’t bought any properties in 2017 although I’ve enough money set aside to buy another house once the opportunity arises. I suspect I haven’t moved yet because I’m still looking for the kind of deals I got in 2011-2016 and those are becoming fewer and far between. For me the question isn’t whether we are in a bubble or not (although I’m quite sure that Mississippi is not in a bubble.) It is whether a given property makes sense *now* on the basis of the return I will get on my investment. As the Great Recession taught us rents don’t go down because a housing bubble bursts. They might even go up.

  16. Joe Scaparra

    Nice Article Scott, some very good points made especially not having your eggs all in one basket and being financially sound will position you to survive most any downturn. I am somewhat surprise that you admit that you are somewhat scared of a downturn. I have a different spin on that.

    There will be a downturn in real estate and it will catch most by surprise. Those who do anticipate the downturn probably just got lucky. If you encounter the downturn as an INVESTOR you should be fine, but if you encounter the downturn as a SPECULATOR then your going to be in for a rough ride.

    I am a buy and hold investor in Texas. There are Speculators here as well as Investors. Both have been doing well as of late. You know the saying “All boats rise when the tide comes in but you can see who is swimming naked when the tide goes out”.

    We all have heard of or know people who lost their home (foreclose or short sell or just big lost). So we know that can happen. However, have your ever heard of this happening…….Rents fall in half, say from $1000 a month to $500/month. High end rents could tumble, I’m not talking about those type rents.

    In Texas, with a population increasing, property values generally cheap compared to the nation, low interest rates, and renting to blue collar, you have little investment risk. Especially if you look at small multifamily properties like duplex, triplex and fourplex. I owned a portfolio of small multifamily beginning in 2002. I have consistently raise rents even through 2008-2010 downturn. Although my tax appraisal decrease somewhat my rents stayed steady or climbed during that period. However, I am an investor with metrics and strategy that I employ. For low income housing (arbitrary defined as rents below $1200, my definition) the individual property won’t get you in a bind, it will be cash flow positive.

    I take the low hanging fruit. As I tell my peers, I can buy a duplex for 150k sell it 12 years later for $130k and still make $100k…..the risk is minimal and has little to due with a housing bubble. More risk associated with property management than the actual housing market.

    For me it is all about cash flow. Even though housing prices drops, rent usually remain stable. Its like dividend stock investing. Dividends change very little as compared to the stock price. If you live off the dividend then you can ride out the downturn of the underlying asset. Same goes for real estate, if your cash flow is good you have little risk of a market downturn.

    • Scott Trench

      Joe – this is just great all-around insight. I have a question for you though. I understand that cash flow is the key to sustaining a business, but do you ever sacrifice just a bit on the cash flow front (not to the point of negative cash flow, but perhaps to the point of slightly LESS cash flow) in order to increaese your odds of seeing potential appreciation? Is there a way to operate a business that is largely recession-proof, AND put yourself in position to advantage from appreciation over the long-term?

      • Joe Scaparra

        Scott, Yes I do sometimes. I try to do 1% or better but on at least one time I adjusted to less than 1% if I think the property has a better chance for appreciation or if I think I can get increase rents in the near future.

        Absolutely I think of my rentals as a recession-proof business and as most hard assets they tend to appreciate over time. Since my focus and goals are cash flow oriented, I have little risk as my returns are not dependent on the property appreciating to make money. I started developing my portfolio in December 2002 and not really thinking about appreciation it has only been the icing on the cake. I have yet to sell any of my properties so as you can see appreciation is nice by not a necessity for me to be satisfied.

  17. real estate is a lousy investment, unless you are buying it for 20% of current market price- because of the maintenance, property tax, heating, utility, insurance overhead involved. even if it sitting there empty it’s costing you money just to have it. renters come and go, rent is not guaranteed forever 100%. managing and renting properties is nothing but a big PITA.

    • Joe Scaparra

      @Gary Williams Wow with an attitude like that I wonder why your even on this website. Your probably looking for a confrontation. Being a former Fighter Pilot we are ALWAYS up for the challenge.

      I think investing in real estate is one of the best ways to invest, if not the BEST way to do it. I actually think of my investments as buying 20 cents on the dollar. Typically I buy using 20% down and then not use anymore of my money for the property, to include taxes, insurance, property management, or maintenance. The positive cash flow take care of all that plus pay off the mortgage over a 12 year period.

      Yeah you are right rent is not guaranteed. If your investments has to have a guarantee for you to invest then you are left with FDIC insured bank product paying you 1% a year or insurance product that guarantees a death benefit when you die. I can’t beat a return on someone who gets a million dollar life insurance policy for a 10k yearly premium and dies the day after the policy is enforced, but the downside to that is your not around to enjoy the payday, LOL!

      Most of my rentals provide a 20% or more Cash on Cash return day one. You are correct sir that property management can be a PITA, but so is having to go to work every day! You know another PITA is running out of money in retirement or not having enough to live at a life style you have been accustom.

      Gary Williams, I give you one more point blank shot at me. Lets see if your gun fires or jams. Answer this question. Have you ever in your lifetime seen rents fall in half over a period of a year! I am talking about rents like $1000 a month and you go to the property manager to renew for another year and they tell you it is your lucky day we will renew you for half the amount you are currently paying. I am talking about blue collar type rents, not rents that start at 4k a month dropping to 2k. You see we know of people who were foreclosed on or their home took a dive at the time they lost their job and they had a significant loss, but I am talking about cash flow low income rentals (750-1200 rents) dropping in half. You see unless you say yes to my question, there is little market risk to my buy and hold strategy. I think your gun is jammed.

  18. Michael Forbes

    Great, even-keeled article, Scott. As a new RE investor, it’s important for me to remember that getting in a hurry would be a mistake. Consistent action taken on a firm financial foundation makes 100% sense to me in this (and any) market.

  19. Marie S.

    Don’t invest more than 3 years savings?! Well I live in Los Angeles and my LIFE savings isn’t enough here to get into the market yet, so by his estimation I should never enter the market? Because if I can only save MAYBE $15k a year I’ll only have $45k for a deal, and if my current life savings isn’t enough, $45 never will be UNLESS i wait for the crash. So I’m getting mixed messages from this article..

  20. David Etenburn

    I was wiped out in 2008. I was too highly leveraged and somewhat reckless; and while the downturn in the Seattle area was less severe than in Denver, the negative cash flow killed me…especially when I became not just unemployed, but unemployable.

    That said, in rebuilding my portfolio, I too, am not worried about the potential for lower prices down the road, as long as all my investments combined produce enough cash flow to pay my mortgages -including the house I life in. This way, when things head south again, next week or the next decade, I believe I will be able to stay afloat.

  21. Buckner Toney

    Go back and listen to some of the early BP podcasts, I crack a smile when Josh and Brandon are talking about overheated markets and a possible bubble in real estate 5 years ago! Just goes to show you never know what the future holds!

  22. Christopher Smith

    An interesting insight on this is Buffett and Munger’s. Neither could care less where we are in a market cycle, it’s simply not of any interest to them or in any way directly relevant to their investment determinations. Which is all very fascinating since they have complied the greatest investment returns over a period of at least a half a century between the two.

    As long as the intrinisc value of what they might investment in is meaningfully less than it current FMV, it’s a potential acquisition to them. If an emotionally driven market decline occurs immediately after buying into a position, then simply buy more.

    Of course determining true intrinsic value is no game for amateurs and requires significant application of necessary due diligence and enterprise valuation skills, but in concept it’s not rocket science either.

    As Buffett says, investing is not really in the final analysis an intellectually complex activity, but one extremely challenging for most people to be successful at because they lack the emotional constitution to unfailing adhere to a well concieved yet simple plan.

    It’s also interesting that both have utter disdain for market timing claims, as they so readily note it cannot be consistently done and those who assert that they can are adject liars.

    Of course that doesn’t mean market valuation multiples as a whole are always irrelevant as opportunities will be likely be more prevelant when they are very low than very high, but trying to consistently capture or exploit any market’s emotional dysfunctionality du jour through active trading is an idiot’s forte.

  23. Vaughn K.

    As other people have basically said:

    Make sure you’re cash flowing, and won’t HAVE to sell during a down market.

    This is the most important. You will survive, and come out fine long haul that way.

    That said: Fundamentals! There are a few basic metrics in real estate that are as solid as the rock of Gibraltar over the long haul. Average income to average sales price ratio is my favorite… Long term sustainable ratio is between 5-6 like clockwork. Some economists have verified this very same metric going back AT LEAST to the 1700s, and some think they’ve pinned it down going back to ancient Rome! It seems to be a magic number.

    The thing is a lot of “trendy” markets have BLOWN past this… What that means is as soon as the first hiccup comes along, there will be a correction. That could be a national recession, or it could just be a local thing in a certain trendy market.

    So while a hot market can stay above these numbers as long as things are going perfectly, it will fall back into that sustainable range as soon as something goes wrong… Because it is essentially the floor supported by the incomes in the area. Markets IN that range right now have basically nowhere to fall in a correction, or at least very little room to fall. This describes MANY midwest/southern cities, as well as lots of 2nd string cities and suburbs all around the country, even in the market right now.

    Seattle is at about 10x, SF is closer to 20x… Tell me there’s not major room for a correction there at the first sign of trouble? I dare you!

    So all it is is waiting for a hiccup. And there WILL be one. Heck, Amazon HQ2 could be the thing that topples Seattle full and proper, and it’s already been announced to be happening in the next couple years.

    We’re not in a national bubble per se right now, it’s just certain markets, and they’re all over inflated to totally different degrees. So you have to know YOUR area, and what local hiccups might happen there, and when. If you’re not too outside the normal zone on metrics, it can make sense to keep piling into the market, as there’s not a ton of downside… But remember the longer a bull market has been going, the shorter period of time it is until something will go wrong.

    Seattle prices just dropped for the first time in several years the last few months… Is the bubble popping full on? Maybe, maybe not. But it’s surely a sign that 10%+ increases are not likely to continue, and that it’s a lot softer than it was a few years ago.

    Pay attention to the fundamentals, use your head, and make sure you have the cash to survive a downturn… If you do, you’ll be fine long haul even if you do buy towards the top of a market.

  24. Nicholas Lohr

    I’ve found that many strategies investing in stocks for the long term also apply to real estate investing. In this case it would be ‘Dollar Cost Averaging.’ In stocks, its continuing to put in capital consistently whether or not the market is up or down. It’s just as effective a strategy for real estate.

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