If there is a correction...

[Luke Grieshop]

Hey guys, Q: 

Say there is a downturn/market correction in the next year or two, what's the best strategy today if you're hungry to get involved with REI? I hear time and time again from podcasts & advice online that this shouldn't be an excuse to pass on getting started (nobody can predict the future). I live in Scottsdale, AZ, and home values have increased considerably since 2012 - as most have - and we seem to be getting to that point.

Here are my interpretations (keep in mind, I'm very new to all of this). Please correct me where I'm wrong and share your thoughts on this topic:

-BRRRR would be a risky play, because investing into rehab and then refinancing after a period of time may not work out if the market dips; your investment could plummet and money will be stuck.

-Buy & hold is still a good option if you find a great deal that will produce monthly cashflow. 

- Wholesaling is also still a good option if you can find deals, because there's no skin in the game.

[Steve Vaughan]

If there is a correction..... hopefully I'll be glad I am selling my single-families into the froth as they turn over.  Hopefully I'll be glad I am paying down my higher rate and higher hassle debt.

Make sure the numbers work and don't force anything.  I feel for folks just starting out at these price points.   There are distressed sellers in every market, find the sudden sellers and you can still make it work @Luke Grieshop   

[Jeremy Hua]

The only thing I would buy, is something that cash flows. There’s no point in buying on speculation that it’ll appreciate at this time.

[Tyler Herman]

-BRRRR would be a risky play, because investing into rehab and then refinancing after a period of time may not work out if the market dips; your investment could plummet and money will be stuck.

Money being stuck would just make it a buy and hold property, although maybe it took a little more money than it normally would. I wouldn't call that risky exactly. 

[Ned Carey]

@Luke Grieshop  I would just be more cautious and wait for great deals. If great deals don't come, I wait longer.  If you do buy & hold them make sure you have a safe Debt Coverage Ratio.  If you rehab, make sure you do not have a backlog of properties waiting to be rehabbed.

[Steve Vaughan]

If there is a correction..... hopefully I'll be glad I am selling my single-families into the froth as they turn over.  Hopefully I'll be glad I am paying down my higher rate and higher hassle debt.

Make sure the numbers work and don't force anything.  I feel for folks just starting out at these price points.   There are distressed sellers in every market, find the sudden sellers and you can still make it work @Luke Grieshop   

[Caleb Heimsoth]

If there is a correction I think it will be mild. If there’s a major correction I think it’ll happen in the early 2020s. Something to watch out for next year will be how the Fed unravels it’s giant balance sheet. If it goes to fast it could spur a correction.

Aside from those things something geo political like the conflict with North Korea could also cause it.

That being said, real estate is local. The last house I bought basically appraised for the same price as it did in 1998. That should tell you that, that area basically doesn’t appreciate, but it cash flows well.

[Mike Dymski]

Many investors don't know how...or care to try to time the market.  They just have criteria and stick to it.  There are motivated sellers and undervalued properties in every market cycle and not every market moves with the national trends.

2008-2013 was the exception, not the norm.  It takes work to get high double digit returns.

[Luke Grieshop]

@Mike Dymski I really like that point. Have read several times now how important it is to establish a criteria. 

@Steve Vaughan Could you explain more what you mean by "higher rate and higher hassle debt"? Thanks a lot for the tip on the numbers & being patient

Big thanks to everybody for helping me out!

[Mike Dymski]

Originally posted by @Luke Grieshop:

@Mike Dymski I really like that point. Have read several times now how important it is to establish a criteria. 

@Steve Vaughan Could you explain more what you mean by "higher rate and higher hassle debt"? Thanks a lot for the tip on the numbers & being patient

Big thanks to everybody for helping me out!

Oh, this is a softball pitch for Steve

[Tyler Mullen]

@Luke Grieshop

Whatever you decide you better get busy. Any kind of investing is about investing in the best thing you can find at the time you have the funds available, not waiting for the "perfect" opportunity. There's plenty of opportunities that have hit hundreds of 52 week and then all-time highs in the past 5 years (stocks and REI) so waiting on them to go down would have been pointless.

Even if something DID get cheaper, would you buy it 10% cheaper or would you be thinking, "Why don't I wait for it go even lower?"  That's called being greedy before you even own it, also pointless.

[Chris Grenier]

if you try to time the market, you'll never do any deals.

think of it this way, if the scenarios you listed were realistic, there would never be a market for anyone to ever invest in real estate. 

[Joel O'Leary]

We hear in the BP podcast a lot the strategy of Dollar Cost Averaging.

Meaning, buy in the high times, buy in the crashes, and buy in the middles. You can’t wait for the perfect market to arrive before jumping in.

[Russell Brazil]

I would not wait for a correction. Predicting the such is simply not possible. If one were to happen, I would buy more properties, but it wouldnt stop me from continuing to buy now.

[Steve Vaughan]

 I have/had older residential or seller-financed mortgages above 6%.  That used to be a good rate!

Also paid off commercial loans with adjustable rates that were callable and bothering me for my financials every year.

@Mike Dymski- too funny, bud!  Like hitting off of Giles in the World Series!

[Vivek Khoche]

@Luke Grieshop- If there is a correction most of folks will be gone from REI discussions. 90% of the investors are not on BP. There are deals all over the places. Define what is deal for you and why, how would you ensure that it is not going to be a deal for other investor.

REI lately has been like a merry go round with only difference is new investors are getting onto ride on top.

The previous investor who is local could not make money in 13 years , what is your guess about the new investors success after  paying 50% over the price.  This could have been a deal at $67K.

Good Luck

Vivek

[Alex K.]

I can't really comment on BRRR here, but you absolutely could get stuck for a while with the property.

In terms of Buy and Hold - Consider for a moment the time that you are looking to be in your real estate investment. If it is short term, you open yourself up to more risk. The longer term you have, the better off you should be and have less risk overall. Brandon and/or Josh talk about this in several episodes and make a comment roughly of the same nature. Essentially they are saying that over a long time horizon you should be okay.

Personally, I think that you should always buy with cash-flow in mind and be in the game for a long time. If your only exit is to sell when it gets tough, you are going to have a tough time in RE. Whatever you do, find your criteria and evaluate deals. It might take you a day or five years to find the right one, but the more you look around, the more opportunities show up, IMHO.

[Mike Dymski]

Originally posted by @Joel O'Leary:

We hear in the BP podcast a lot the strategy of Dollar Cost Averaging.

Meaning, buy in the high times, buy in the crashes, and buy in the middles. You can’t wait for the perfect market to arrive before jumping in.

Good point on not waiting to jump in.

Most real estate investors don't or can't dollar cost average.  They buy more when prices are lower and vice versa.  They just don't stop buying when national prices are higher because they find properties in markets where they are investing that meet their criteria regardless of national conditions.

Most investors who start to scale do not have linear cash inflows and outflows.  They buy some periods and sell during others, have a lot of rehab going on sometimes and not other times, and have large outflows and inflows, kids get cars, go to college, spouse stops/starts working, large annual bonus payments, commissions...life and finances vary a lot.  I purchased 29 units in 2016 and none in 2017.

Dollar cost averaging is also a more applicable term for small monthly purchases.

[Joe Splitrock]

All the people waiting for a correction will run scared IF/when there is a correction. By definition what happens in a correction is too many people are selling and not enough buying - panic always creates the best buying opportunities. If you don't have the courage to buy in a good market, there is no way you are going to buy anything when the country is in a financial disaster.

People who wait will always find an excuse to wait. True of anything in life.

The best investors will invest in good times and invest twice as much in bad times.

- BRRRR is always risky because it assumes a higher future value.

- Buy and hold is solid IF you pick the right location and the numbers work

- Wholesaling sounds great, but only a limited number of people are good at it. Another issue is legality, which depends on how and where you do it.

[Andrew Syrios]

I should note that BRRRR and buy and hold are very similar. All BRRRR is buy and hold but not all buy and hold is BRRRR. If you're going to buy and hold, you might as well aim for a large equity margin so you can cash out. But in my opinion, it's a myth that you can do BRRRR with no money already. You can, of course, but often enough you will go over a bit or the appraisal won't come back as well as you hope. You need some reserves for that.

As far as timing the market, my opinion is that unless the market is blatantly overheated, you can still dollar-cost average and buy only the best. After a correction though, that's when you want to scoop up as many as you can.

[Jay Hinrichs]

well from my cheap seats.. the only correction I see is if interest rates go to high too quick.. or regional IE jobs leave.

other than that there is not going to be a mortgage melt down so in mind view no massive pending correction or bubble

and to have a bubble bursting type scenario ( according to Bruce Norris and I agree) the market needs about 40% of MLS or open market properties to be OREO or bank owned or short sales.. and we are just not there or even close to there.

so many props have been bought for cash.. you have guys like @Steve Vaughan shedding debt he is not the only one.. I am following suit.. 

In my work a day world there are so many people from all over the world and the US paying cash for 1 to 4s compared to prior to 08.. not to mention about 30 to 35% of all American owner occs are free and clear.

only people that are in jeopardy in these scenarios are the overleveraged.. short term debt like those that buy on 5 year portfolio loans that get called.. that can happen..   

bottom line I personally think our market is pretty strong right now.

@Account Closed are you a salesmen for big  sub too ken  LOL  sub too is red hot in really bad markets much tougher in these times.. not that it can't happen but I would be surprised if its as you described.

[Cody Z.]

Wow - very insightful thread. I'm personally exercising self discipline in this market and sticking to the numbers when trying to buy my first live in multi.. it's hard work finding a deal..but just looking at foreclosure rates this year.. I don't see a crash anywhere in sight.

Thanks for all the info from the heavy hitters above.

[Luke Grieshop]

Echo'ing what @Cody Z. said - thanks a ton to all of you veterans for your advice & input. Very, very appreciated