If you are buying when unemployment is 4%, you are buying trouble

[Diane G.]

I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....

As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...

[Scott Trench]

You could be right, you could be wrong. You could also be right and still lose. 

What is the factor that matters in our business? Employment? Income? The stock market? Inflation? Supply? Demand? Interest rates? Leverage ratios? What the millennials are doing? What the boomers do?

We hear this song and dance about impending crashes all the time on BiggerPockets. I heard it in 2013 when I was planning to buy my first property, I heard it in 2014 when I bought, I heard it in 2015 when the first property appreciated, I heard it in 2016 when I bought again, and I hear it now coming off a recent purchase. 

One day, the doomsday prophecies WILL come true. You WILL be proven right eventually. But, will that be this year? Next year? Five years? What if the correction comes in 7 years? What if the bottom of that correction has real estate prices and rents higher than where they are now? Those sitting out will be right, and still lose. 

I personally prefer to adopt a strategy where I win in three scenarios:

1) I win if the market goes up. If you don't own real estate, you lose if the market continues to appreciate.

2) I win if the market goes sideways. I produce cash flow and self-manage to ensure as much profitability from my real estate business as possible if rents do not go up at all.

3) I win if the market goes down. You win if the market goes down if the following two things 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.

B) 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 that owns no properties and tries to convince me that they've known all along that the crash was coming. I am investing alongside someone with years of experience and the conifdence to say "sure, I've lost some equity, but I couldn't care less, every month I achieve a 10%+ CoC return, and I'm ready to buy more now at a 20%+ CoC return!"

No one can predict when the market crash will happen, how severe it will be, or what it's effects will be. The market crash could be 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. If that's the cause of this next crash, everyone holding cash will see the real purchasing power of their holdings decline dramatically... which in turn means that we will sure be glad to have bought real estate before the crash! 

I believe the best policy is to adopt a conservative, winning formula, and apply it consistently. 

I do not believe that buying now will put me in trouble. 

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 to maintain a huge savings rate and avoid potential problems. In case you ARE right (and we are certainly at least four years closer to the next market correction than we were when I started investing) I do not want to be caught with my pants down. 

But I am not staying out of the market entirely, and will buy a solid cash flowing rental property again next year to maintain my system of dollar cost averaging, regardless of the conditions.