What happens to you if (when) the market crashes?

[Account Closed]

Hey everyone, I recently decided I’m going to build a fourplex to owner occupy. I would potentially walk into this deal at 0 down for a $500,000 fourplex. I have one SFR rental, and was just curious, what happens to me if I have that and the market crashes? I keep YouTubing and looking for information but I don’t really understand why so many people lost so much? Did they invest incorrectly? We’re their mortgages called up? I just want to know what can happen and how to protect myself. Thank you!

[Joe Scaparra]

Investors need to be smart, especially in this environment. The real estate market is closer to the top than the bottom, yes, so expect tough times ahead. Don't want to be a gloom and doomer and I am not for the type of investing I do. I know military, VA loans, and real estate investing (duplexes are my speciality).

Although I have been eligible to use a VA loan over the last 45 years I have never used it. Especially as an investor trying to house hack while on active duty carries a lot of risk. Plan on moving every three years. That alone causes increase risk. VA loans allow you to get into a property with NO SKIN IN THE GAME. Some see that as a benefit, I see it as a disadvantage. Most VA loans are used by people with little to NO reserves and that is dangerous!! Before 2008 you could by an investment real estate with as little as 3% down. Not now, for a good reason. I have always put down 20% or more even before 2008. Makes the number work great if your a buy and hold looking for CASH FLOW.

Bottom line, put 20% down and buy with no less than the 1% rule.  The more doors the property has the easier to get 1%, in fact you should do better than 1%.  So looking at this 4 plex example.  Paying 500k you need to get $1250 rent from each unit just to consider the deal.  If not there are better places to invest.  

Rules for success in Multi-Family.  Invest with the following:

1.  Population Increasing.  Not by Oil Boom or possibly temporary reason.  Here in Texas, Population is Booming along the I35 corridor from San Antonio to Dallas.  Opportunities abound!!!! Careful out in the sticks where oil drilling is going on, it can be boom or bust and turn on a dime.

2. Buy Multi-Family! I like, no; I LOVE DUPLEXES!! Use the 1% rule or better as a guide! Within this parameter, starting with rents below $1200 a month will keep you from major risk of a down turn. We have all heard of people buying real estate and due to job loss, or recession they lost the house to foreclosure or severe loss. That can and does happen! But my friends when was the last time you EVER heard of this.......I was renting an apt for the last 3 years at $1000/month and went to the leasing office to renew my lease and they told me it was my lucky day my lease was going to drop in half to $500 per month due to low vacancies caused by the recession. Yeah that is Right, it never happens in an area where population is increasing (Think South, not Detroit). Don't get me wrong, if your renting a SFH for $5000 a month those rents are at extreme risk during a downturn. But if your rent is $1200 or below your rent will be rock steady or go up in a downturn.....WHY? Because people renting from you have jobs that are not lost in a downturn. Think Mac Donalds worker. How many of those people lost jobs in the recession. People who lost jobs, lost homes and/or were paying too much rent and now they are downsizing into your duplex to save money. Your demand actually increases!!!! Crazy.

3.  Buy SINGLE STORY properties.  Your future renters are going to be BABY BOOMERS retiring with no money.  They can't buy and must rent, but their hips and knees won't allow them to climb stairs!  You will have little wear and tear on your properties, they will be living on Social Security and your rent will be the first thing they pay you!!

4. Have a 12 year plan.  Buy with 20% down, save 1st year profits as maintenance reserve, take profits year 2-12 and pay off note and you will own free and clear.  After down payment and initial rehab, you spend none of your own money, use tenants and the property is yours free and clear 12 years or less.  Essentially, your paying 20 cents on the dollar for property that is most likely going to be worth 50% or more than you bought 12 years earlier with unbelievable cash flow.  

5.  Those who make it a habit of investing no money down will most likely hate real estate as an investment years down the line.  Good Luck!  BTW, I welcome a downturn, I am not selling now, every property I have ever bought as an investment I still own.  The downturn only helps me buy more!!