anyone live through the 08 crash with a 4plex in their portfolio?

[Bea Leichliter]

Hi all,

I am a real estate agent and a new multifamily investor. I have 1 4plex purchased last August cash flowing at about $1000/mo and a SFH rental which funded the multifamily and breaks even. We are working on our second multifamily deal, which will cash flow $1000-$1400/mo.

Prior to being an agent, I spent 20 years as an engineer.  My husband is an engineer and all of my friends are engineers.  

My engineer friends are calling us stupid for investing in a peaking market.  I have run the scenarios, done the spreadsheets and have a successful 4plex under my belt, but I have not lived through a recession with a 4plex in my portfolio.  Does anyone have experience with the last recession and a 4plex?  Can you share your experience?

BTW, I am in a Colorado Springs which is currently experiencing huge economic and population growth.

TIA

BEA

[Account Closed]

Bea,

Congrats! I was an engineer in my previous life who decided to dive in into real estate head first when I recognized an opportunity once in a lifetime in 2009. I've made it in real estate by many people's standard so that engineering degree was worth something. 

Along the way, I met an agent who used to own five 4-plexes and five SFHs in San Jose. He lost all five 4-plexes and two SFHs during the downturn. Rents barely dipped during the crash, but his income of $80k/month basically went down to $0 in 2007 and 2008. His $10k/mo of negative cash flow, which was nothing when he was making $80k and could use the write-off, suddenly became a burden. He went through $250k reserves within months. He was able to hang onto the three SFHs which had little debt and positive cash flow. 

During the downturn, he used the rents from the 4-plexes and SFHs to pay for his living expenses. He owed the IRS over $500k and about $150k to the FTB. The reason I knew all of this because I bought one of his SFHs during the downturn as a short sale and this information was disclosed on the preliminary title report. We became buddies, and he called me his lucky charm after a few transactions and I helped him with various things.

You're in a much better position in a sense that your 4-plex is cash flowing positive. Cash flow positive is critical. Local population and jobs are critical. Reserve is critical. How much reserve is enough? Run a stress test and see how much you would need to weather a 3 to 5 year downturn. My partner and I ran a stress test for our portfolio. Based on a 25% rent dip, we would need $500k in reserves to weather it for 5 years. That's $100k/year of negative cash flow. We set $500k aside for it. Done! 

Hope for the best but prepare for the worst.

Best of luck.