Buy a house-hack now vs buy during next recession?

Question

Hey everyone,

Last year, I started looking at multifamily 
property in Oakland to house hack so I could live cheaply / free while 
building equity. While the cash flow and numbers can work with the right
 property, I think a recession is 1-2 years away, so buying now could 
have some drawbacks since I only plan to stay in the area for ~5 years 
max.

Below is how I'm thinking about it, but what do you think? Am I off base, have I missed something?

To test my thinking, I created a simple model that projected total cash flow and equity over 5 years if I:

• Bought a good, cash-flowing MFH now and recession hit in 2019
• Waited and bought an MFH in 2019 during a recession
• Waited and bought an MFH in 2020 during a recession

The
 model assumes that a recession results in a 10-20% drop in housing 
prices which rebound over 1-2 years. If I don't buy, I would rent for 
$1300-$1400 / mo by living with a roommate (what I actually do now).

Based on the model, I think waiting to buy makes sense for a few reasons:

• Buying
 during a recession is 15%-40% better from an equity and cash flow 
perspective when compared to buying a deal right now. This is driven by 
better rent:price ratios during a recession, not buying high and going 
through the rollercoaster of house value fluctuation, etc.
• I can afford a house in a better location once house values fall in a recession

Obviously,
 waiting to buy obviously only works if I am still employed and can get a
 mortgage approved in a recession. I think I can make that work given my
 work situation and how much I can save each month to meet higher down 
payment requirements when lending tightens up.

Thanks in advance for your thoughts!

Eric

Patrice Penda · Answer

Hey @Eric Li

Investors don't make money by timing the markets.

No one has ever accrurately and consistently predicted where the market is going. No one!

It is just impossible, there are too many factors at play to do so.

Some people get it right sometimes but not at all.

People make money by making sounds investments, based on the fundamental of the investment or opportunity

Speculators try to time the market or think they can.

Don't stay on the sideline thinking that because there is a recession around the corner, you will be in a better position to profit from it when it happens.

It is very unlikely because you would have never done it before.

The people who are most likely to profit from it are today's investors.

They are in the trenches, acquiring assets, building connections, getting the know-out, facing the challenges, looking for solutions, gaining experience, building momentum.

When the recession hit, they will still be out there learning from their mistakes but still buying.

If you have been sitting waiting to get into the game and looking to borrow for example, people will be less likely to lend you.

If you think a recession is around the corner, still invest but be conservative.

For example, if you were going to be a house ot live or rent out, buy a house that is coming at a discount on the market because it needs repairs.

Doing the work and making the repairs will provide you with equity in that house that could you shleter a recession.

Buy in area where the house prices are not massively inflated so that your monthly expenses (including mortgage payment) are well below the rent that house would command.

In that scenario, you have some protection should the market dip because you'll able to hold on to that house for a long time without having to worry where the market is.

Andrew Muff · Answer

@Eric Li One thing that often happens (not always which is why predictions are so error prone) is that the stock market takes a big tumble during a recession. That usually signifies that the recession started 6-12 months ago and no one noticed until now (then). After that the real estate market follows, but much slower.

The net effect is that the down payment you are sitting on now invested in stocks and mutual funds takes a bigger hit than the reduction in RE values, making it much harder to buy the same property you could have bought today.

There are a lot of assumptions baked into that statement, like that you have a chunk of change in the stock market, or that you even have a sizeable down payment. The point is your model is fairly simplistic and is missing many of the variable that would effect the real outcome.

I'm with @Cara Lonsdale on this one. If you can find what appears to a deal, or at least a reasonable cash flowing opportunity, I would invest. Unless the recession is already here and the stock market crashed, I don't think you or anyone can reasonably predict the future with any accuracy.

Cara Lonsdale · Answer

I wish I had your crystal ball to predict the market.

Investors buy and sell houses in every market condition.  Recessions only affect people if they are selling an upsidedown property at the time.  If you buy a property, and the market depreciates, what affect will it have on you if you have it rented and cash flowing?  You just ride out the recession and re-evaluate when it corrects, and collect your cash flow all the way through it.

Eric Li · Answer

@Andrew Muff, appreciate the call out about the stock market hitting down payments. To hedge against that risk, my down payment is pretty conservatively invested and not too stock heavy. I think you're probably right that I should act if I find a deal / cash-flowing property.

@Patrice Penda, great point about getting into the game so I'm in a better position to act if a downturn does hit. And love the tip about buying a house that needs repairs to build equity and shelter against a recession.

Gotta get my butt into gear, thanks for the push folks.

Eric Li · Answer

Hey Cara, I wish I had a crystal ball too =). I can't predict when exactly a recession will hit, but I am pretty confident one will hit in the next 2-3 years. I definitely agree that a recession matters less if I have it rented out, it's cash flowing, and I don't need to sell.

But, when I buy makes a big difference since buying now towards the peak of the market means my $ gets me less house, in a worse location than if I waited, and I get less appreciation if I buy at a higher price point now vs later.

What do ya think? Best to join in the market now and evaluate as market changes?

Eric James · Answer

If you're sure a recession is quickly approaching don't buy now.

Buy a house-hack now vs buy during next recession?

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