1. Vegas example: Any market driven by tourism is obviously going to have bigger peaks and troughs when things go wrong. Just like an short term rental investor, you have to prepare for this is you are going to invest in a market like this. Additionally, the "booms" will be stronger than in a non-tourism driven market, which will partially compensate for the busts. Cash reserves more important here.
2. Your argument about a falling market is flawed. Obviously if we could all predict the future we would wait to buy until the market bottoms. Intelligent investors, whether stocks, real estate, or some other vehicle are fully aware that it is impossible to predict market behavior. Investing in assets that are PROVEN to increase in value over time will pay off greatly long term. Compound interest is always your friend.
3. You act like saying "You don't take a loss until you sell" is unsound logic. For those who pulled out of the market in 2009, how do you think they felt about their decision in 2014? Return on investment is a function of risk, and we all know this, so why not prepare for the down market rather than fear it?
4. Your Texas example is indeed a horror story, but it is also a good example on why diversification is so important. Just like I shouldn't invest my entire 401(k) in Amazon stock, I should not invest my entire real estate portfolio in one property. But once again, you are citing a 1 in a million example. If I cite an example about how someone became rich buying Bitcoin, is that an argument that Bitcoin is a sound investment? Absolutely not.
5. Your next argument implies that during the height of COVID an average investor is collecting around 70% of rents. If I apply this to myself, this would make my business turn from being cash flow positive to about flat. Once again, cash reserves become important to whether the downturns that happen EVERY 5-20 years.
Long story short, I am going to keep buying rental properties :)
Originally posted by
@David Ginn:
@Trevor Dominique
I'm going to give you an answer that will be tough to hear and competently against what everyone has been telling you.
Renting homes or apartments is one of the highest risk investments you can get into and doing a cash-out refinance is even higher risk.
Let me explain. In Las Vegas, in 2006 a home could be purchased for $150,000.00. You could rent it for $1300.00 and after taxes and insurance, you would cash flow at over $150.00 per month. Then came the great recession. Prices on that home fell back to $50k. That home could be rented for $600 a month.
So let's look at the dynamics of a falling market. If I came to you and said, “I have a business that's worth $150,000.00. It will make you $150 a month. In two years the markets will fall and it will be worth $50,000.00.” Would you buy my business? You would say to me, “No! Do you think I’m crazy?”
You see in real estate for some reason we seem to think that we can deny all business fundamentals and that somehow, our situation is different. I have heard everything from, “You don't take a loss until you sell." to "It will rent during a down cycle." Most people who hear me say this still believe in defying the odds. They think of all types of arguments to try to prove my business sense is wrong.
Here is an actual example shared with me that happened at the start of the Covid-19 crisis. As you read this, keep in mind that this happened in one of the market segments that people would have said is the most recession-proof.
There was an investor in Texas that owned a 30 unit complex. COVID-19 hit and they stopped all foreclosures and evictions. All the tenants got together and decided to not pay rent. Now, whoever owned that building and had the loan on it just got trashed by his tenants. He and his family's financial lives have been turned upside down. He cannot even get to a judge until June, and then the courts will be so backed up, it could take months to get his tenants evicted.
Also, my local news reported that 1 in 5 market-rate apartments are missing rents right now, and nationally it's 1 in 3. The real issue is clear. You can buy and rent when a market is headed up a bit, just like a business or a stock that you sell before a market starts to fall.
Buy and hold investing is a term that does not make good business sense. There are much better strategies to do in real estate when a market could potentially fall or is falling.
