Market Crash Strategies

[Jacob Stone]

What are some of your ideas or strategies in place (outside of 6-12 months of reserves on hand) that you have for your long term properties for when the market/economy crashes?

[Joe Splitrock]

@Jacob Stone I am invested in a market/ economy that I am confident will not crash. Even if our economy enters a recession, I believe my market will be resilient. This was true during the great recession. As other markets had job and population loss, people were moving into my market because there were jobs. 

The problem you are facing is what I will call the "crash paradox", which is three fold:

1. Everyone claims to be waiting on the sidelines with cash, but the only way a crash happens is if nobody has cash and very few investors jump in.

2. People waiting to buy are scared to buy in a thriving market when values are going up quickly, but it is even scarier to buy when the market has crashed and prices are going down. 

3. Markets that see massive price drops will only experience that with job and population loss, which means there are not people to live in the properties that you may buy. You get a good price only because it will be hard to find someone to live there.

Most importantly, as @Joe Villeneuve pointed out, "when will the crash happen?" There are no fundamental indicators right now that show we are headed towards a crash. Record low inventory, low interest rates, high demand are all factors that mean a crash is not imminent. Even the crash that happened in 2010-2012 actually started with excess inventory building in the late part of 2005 and building until 2009. The "crash" was more of a slow motion event that took years to unfold. 

Maybe I am wrong. Maybe in six months we have some horrible disaster that throws us deep into economic chaos. At that point the last thing on anyone's mind is buying rental houses. You hoard any cash you have to pay your bills when you lose YOUR job. Someone with more money than you and less fear will swoop in and buy up everything for dime on the dollar. 

To answer the original question of how to prepare. I don't think you can prepare for a crash. 

I have become convinced that it is best to just keep buying at all times. You will buy some in up markets and some in down markets. This concept is "called dollar cost averaging". Over time some deals will be better than others, but it averages out. 

The other benefit of buying earlier is you leverage time. Let's say that I buy a property for $100,000 today, when the market is high. For the next three years, it increases in value 10% a year and is worth $133,000 in three years. You wait and in year four buy a similar property after the value "crashes" to lose 20% of it's value. It is now worth $106,000 and you swoop in to buy the deal. Notice that even after the crash, the property is still worth more than I paid for it years earlier? I also have the benefit of cash flow and mortgage pay down over those four years. Fast forward a few years later and my property value recovers well beyond the pre-crash value. If I don't sell when prices are down, I never even lose anything. Time is so powerful that even mediocre or bad deals can turn out good if you give them enough time. 

I am not saying to rush out and buy a bad deal, but there is opportunity out there. I have said before that waiting for a crash is a fools game. You are waiting for something without knowing when, if or how it will happen. When it actually does happen, you are likely to miss it.