Madison, WI · Member since 2016 · 88 posts · 34 votes
As the housing market is climbing and has been for some time, people are getting skeptical about how soon things will change. When looking at ways to build a portfolio with "no & low money down," it's all about leverage. However, the biggest concern I've heard with a highly leveraged business is the impact of the market during a downturn.
I'm wondering what is on people's minds when they think this way. While it may be true that the value of the home will drop, that would only matter if selling during that downturn. Rents should stay the same, mortgage & interest payments would stay the same. Expenses would stay the same. It should continue to cash flow.
Hoping that we can get a few opinions about the details of this market function. Thanks!
Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
9y
@Braden Coast Not my experience during the last crash. It's never a "real-estate only" crash. Businesses run into trouble, people lose jobs, get thrown out their houses because they can't pay the mortgage anymore, etc. etc. These people cannot buy houses. They lost theirs. They need to rent. That's exactly what happened 2007/8 (and later still!). While in a tough market it will most likely be more difficult to raise rent, I have not experienced much of a decline in rent in such a market either. But that most likely also depends on the location. Heck, it's real estate! Therefore: location, location... ;-)
I really don't see where this is coming from and why a highly leveraged place would be an issue for an investor (!) in such a downturn. This is, of course, assuming that the cash-flow is good, i.e. DSCR is decent. Maybe someone has some pointers.
Ketchikan, AK · Member since 2016 · 30 posts · 9 votes
9y
This is something I've been focusing on lately. In a large downturn you might have a significant amount of "would be" renters decide to purchase instead of rent. Resulting in a smaller amount of renters and supply/demand making for cheaper rents. Probobly a very small effect if any tho. Love to hear some others input
Professional · Loudonville, OH · Member since 2015 · 125 posts · 37 votes
9y
I agree - if you are investing for cash flow, it should have little effect on you. Those who are flipping or buying for appreciation, however, would likely be heavily impacted by a downturn.
Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
9y
@Braden Coast Not my experience during the last crash. It's never a "real-estate only" crash. Businesses run into trouble, people lose jobs, get thrown out their houses because they can't pay the mortgage anymore, etc. etc. These people cannot buy houses. They lost theirs. They need to rent. That's exactly what happened 2007/8 (and later still!). While in a tough market it will most likely be more difficult to raise rent, I have not experienced much of a decline in rent in such a market either. But that most likely also depends on the location. Heck, it's real estate! Therefore: location, location... ;-)
I really don't see where this is coming from and why a highly leveraged place would be an issue for an investor (!) in such a downturn. This is, of course, assuming that the cash-flow is good, i.e. DSCR is decent. Maybe someone has some pointers.
Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
9y
@Erin K. Indeed they would. But they typically don't leverage. And if they do finance a flip with hard money or whatever then it would really be bad luck if they were caught by this while in the process of flipping and actually losing money. And if so then they probably ran their numbers a bit too tight to actually make a decent profit even in the "normal" course of things.
Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
9y
Most people don't typically buy homes in a crash. This goes against the "taught" logic people have been ingrained with. When the economy crashes you should pull back, down-size, and wait it out. Fortunes are made and lost in down turns.
They're typically made by those who capitalize on the decreased price.
Jericho, VT · Member since 2016 · 24 posts · 8 votes
9y
Tyler Kennedy thanks for the thread. Glad to read all the responses and hear this. I'm new but would invest in buy and hold properties that have positive cash flow.