Success in the Pacific Northwest and questions

[Kirill Chervets]

First of all I want to thank Biggerpockets for an awesome site and tons and tons of information that has helped me succeed. Wouldn't have been able to do this without you guys.

Here is a little back story, I purchased my first townhouse in 2011 in the city of Mill Creek, Wa for 110k and have been renting it since producing great cash flow. It now is worth 275k all day.

In 2013 I bought a home in Bothell, Wa for 150k and now worth 240k also rented and producing great cash flow.

My latest purchase is a duplex in Everett, Wa purchased for 243k with 10k into it for maintenance and repairs. Rented for 1240 and living in the other side for free.

I feel like Snohomish County is now overpriced and at 2006 levels. My question is whether I should sell all three properties, net around 300k and reinvest it as the properties values are no longer in line with the rents or just continue to allow tenants to pay off properties and keep saving more money. I don't make very much at my day job and it takes a while to save money for down payments. My goal is to build enough passive income to not have to work until 60. I am 27 years old now with a bachelors degree and no debt outside of real estate. Can someone local please help or offer suggestions? Feel free to ask other questions that would help clear up the situation. Thank you!

[Ryland Taniguchi]

I am in a similar predicament with my rental properties that I bought around 2010 and 2012. Got killer deals and bought when you can buy when the price was cheaper than replacement values.

The problem is no one has a crystal ball. But what we do know is that real estate is usually going up 2/3 of the time but is always "crashed" 1/3 of the time. The real estate market always crashes and it always crashes after the stock market crash.

My general analysis is that real estate historically tends to go in an 18-year cycle which would put the next major crash around 2025 or 2026 give or take. We're more likely about to hit a crash similar to tech bubble crash in 2000. We don't see the signs that usually proceed a major crash... Surplus of new construction housing inventory, "liar loan" and the majority of the population buying real estate. We do see some classic signs of a real estate bubble... Plumbers charging 300%, construction labor shortages, multiple offers, lots of interest in real estate, and lots of people attending Reaps/Reia events.

However, there is a major glaring exception to this 18-year cycle trend and that is global currency crisis. What concerns me is China.

A little historical background:

After WWI, America demanded to be paid back by European countries in gold. Between 1910 and 1930, America owned 70% of the worlds gold reserve. By holding gold, we manipulated global currency so that money flowed into the US for two decades. This lead to the industrial revolution in America over two decades that added TV, radio, autos, planes, roads, etc. the currency manipulation created 40 golden years of prosperity.

That prosperity faded in the 1960s when the Republicans overspent money on wars and the Democrats overspent money on social programs. Lyndon B Johnson's "Guns and Butter" devasted the US economy. And yes both political parties are to blame! 

All this liberalism and warfare moved gold out of the US. Things got so bad that the Bretton Woods agreement a gold exchange standard permanently replaced the gold standard. Nixon took us off the Bretton Wood standard in 1971. This currency collapse was the only time in US history where the real estate market had two major crashes in a 8 year period. The real estate market had a major crash in 1971 and 1979. 

What concerns me is China. By pegging the yuan to the dollar, China like the US from 1910 to 1930 manipulated the global currency system to create an industrial revolution. The next major Crash will involve China and global banks that go bankrupt when the Chinese stock market tumbles.

The question that no one knows is will China crash in 2016 or in 2025. When China does crash, the entire global financial system will go into a decade long depression and global trade will break down. 

The answer to your question about when to sell depends on whether China crashes in 2016 or 2025. I am gambling that the probabilities are much higher that China will avoid a major financial catastrophe for another decade but who really knows. I am holding my rentals till the next bubble around 2023.

Some tips:

1) Keep 10% in gold and dig in a ditch. And I am not even a doomsdayer. 

2) Keep 1/3 of your money in safe liquid assets. I personally use life insurance cash value (both whole and IULs) and tax lien certificates. This topic is very complicated and I don't necessarily believe others should copy it.

3) My real estate portfolio today is 50% land development where I get the land for free and only do development in hot areas and in cash flow areas. 25% is flips in hot areas like Ballard and Bellevue. 25% is BRRRR in 1% rule cash flow areas like Tacoma, Olympia and Arlington. So I am adding some cash flow properties but the only deals available are "fix to rent" deals. Most of my investing now is in safer velocity of money strategies in areas that did okay for me during the 2008 crash.

From 2010-2012, I was just buying 2% rule cash flow rentals from out-of-state turnkey providers where the replacement cost was less than the purchase price. I personally like Phoenix as the biggest yo-yo. Housing in Phoenix will go up to $350,000 and then crash back down to $80,000 again in the next major crash. I like to buy on the bottom in Phoenix and then invest locally here in every other time in Pierce, Kitsap, Thurston, King and Snohomish. If I had more cash the next time around, I would add some appreciating assets in Seattle as well when the market bottoms out. 

If you have liquid assets, market bottoms are a great time to pick up cash flow properties. Then hold for 10-14 years and cash out.

I also like to buy some 2% rule cash flow rentals in Kansas City and Birmingham now as a hedge for more severe market crashes on the west and east coast. I think the Midwest is less volatile.