Proper Positioning for a Downturn/Crash

[Jahan Habib]

This is not intended to be a doom and gloom thread about any potential economic downturn some time in the future, but rather discussion regarding the proper position oneself to benefit resulting from such an event.

I would imagine that the buy and hold investors would be playing 'defense' first -- meaning making sure that their tenants are able to pay the rents/that they have liquidity to service debt. After that, there is the opportunity to play 'offense' which means looking for deals at cut rate prices. For the flippers, I expect them to be trying to unload their fix and flips or convert them into rentals. If they have cash in the bank, then could seek out additional properties, however I would not expect a thriving flipping business during time of economic stress.

The paragraph above is purely hypothetical based on what I would have done. However, I know that many of you have gone through 2008 and prior economic downturns. I would be very interested in learning more about what you were able to do to not only survive but also thrive? Did you have a few hundred thousand dollars in the bank to deploy towards aggressive acquisition? How did you deal with lending drying up? General economic anxiety?

I am looking to gain some insights from the seasoned RE investors who have endured through downturns and not lost their money/business in the process.

[Brian Burke]

Originally posted by @William Yeh:

Anyone else who has weathered multiple cycles care to chime in? @Brian Burke@J. Martin

In 2005 I remember going to REIA meetings and everyone was so anxious to buy $500K rentals that had $600/mo negative cash flow because they would make $100K a year in appreciation. I just remember thinking, "one day there's going to be a huge opportunity by cleaning up the mess." It took about three years but that opportunity came in a big way. I'm glad I mostly sat on the sidelines in 2005.

In 2010 I gave a presentation on why it was a great time to buy houses and rent them out, and that prices would double in five years.  Of course I was looking for investors, that's why I was speaking at this particular conference.  No one took the bait, we got $0 in investors from that presentation and the room was full of people that could write million dollar checks and not think twice.  After the speech, one guy, who was a real estate investor himself, approached to tell me how wrong I was, how the market was still going down and it was a terrible time to buy rental houses.  His message was that basically most people in the room thought the same thing.  That probably explains why no one invested.

Oh well, I still managed to buy over a hundred SFRs in CA after that speech.  And guess what happened?  I was wrong about them doubling in price in five years.  Now that I've sold most of them they actually doubled and a half.  I guess it pays to be wrong.  But not for the attendees at the conference.  Not that I'll shed any tears for them.

Since 2015 all I've been hearing is that the next crash is imminent, and "I'm waiting for prices to drop."  Well, knock yourself out...wait as long as you want, just don't hold your breath because even the best divers can't hold their breath as long as it will take for you to get your wish.

Some people have been waiting since 2015 for a 20% drop...well, prices are up 20% since then in some areas, so a 20% drop now that sparks you to buy just cost you three years of rental income.  Your basis would be the same, but your debt would be higher (you lost three years of amortization). 

Nevertheless, just because the market crashed 30-70% in 2005-2007 doesn't mean that it happens like this every time.  A downturn could just look like a slowdown.  Maybe prices stop appreciating at 15% per year and stay flat for a few years, or appreciate at 1%.  Maybe rent increases level off.  But a big 2005-style crash?  I don't see it.  Not any time soon.

Cycles don't always resemble one another.  They come in all different shapes and sizes.  So when people say "this time it's different" they are right.  It's always different.  But it's not always spectacular.