Why the market crash pummeled millionaire & successful investors

Question

What are the reasons why millionaire and successful real estate investors lost it all during the crash? Was it over leverage? What does it really mean? Was it because of the neighborhood they've invested?

Bill B. · Answer

Luckily all my properties were SFR in Vegas during the last crash so I was able to raise rents like crazy as the people who were over leveraged in Vegas were mostly primary home owners, not landlords.

Put it this way. You put $30k down on a $150k house and it drops to $100k. But it’s paying for itself. You can sell and lose $30k (plus the $20k upside down if they came after you.) or rent it out for 5 years and suddenly it’s worth $150k again and tenants have paid off another $10k. You can sell up $10k ($40k - $60k better than panicking like the primary homeowners did.) or hold on another 5 years and it’s worth $300k.

The “problem” primary homebuyers had is they only put down 3-5% so they were WAAAY upside down and nobody was making the payments for them. Plus they were told to walk away after not making payment for a couple years and nobody would come after them.

I’m sure some apartment owners were hurt and flippers but I don’t know any SFR buy and hold landlords that were crushed. I wonder if you took a poll on here of landlords that have been around 15+ years how many lost everything back then. It MIGHT be 10%, I really dunno. Houses were so cheap and payments so low you’d have to have so many vacancies and I never had any.

There should be a survey option on BP, or at least a “submit a survey” option. I bet primary home owners were hurt 10x more often than landlords. But like my 10% number above, it’s based on my experiences not hard numbers.

Good question/topic.

Account Closed · Answer

They mistook leverage for genius.

Lynnette E. · Answer

Take a look at what happened.  When you bought a property for say $800k and within 6 months it was worth $250k, would you continue to pay for the mortgage payment?  Mind you, you just bought it, so it HAD 20% equity in the original value, now you have no equity.  So you owe more than $600k on a property valued at $250k.  Would you make that monthly payment?

Many people in this situation let the property go.  Saved them hundreds of thousands of dollars just in the price/value consideration.  Some people rode it out, kept the property and 8 to 10 years later they were where they started, owed what the property was now valued at.  Some got loan modifications so part of the loss of equity was 'forgiven'---but if the property goes back up in value you got to pay back that forgiven amount.  (This was not available for all people and all properties.)

If one had the property for years, it made more sense to try to hold onto the property.  If the price dropped well below the loan amount, sometimes the better move was to dump the property.

Also, when the house prices dropped, so did the rents, so if one was depending on the rent to pay for the mortgage, that was not going to happen.  Some could hold out and pay the difference, some could no, some could, but decided financially the better move was to dump the property.  In this case they may have been able to buy property at the now much lower prices and have much better returns...lower price for the property, lower rents, lower taxes, better class of property, better overall situation, even with lower rent.

It really was not: 'Some were in better financial situations to ride it out. Some were bad financial managers.  Some were over leveraged."  It really depended on what the best decision was for each property and in each case for the situation.  For some people dumping everything was the better choice, they ended up with more than those that 'rode it out'.

JD Martin · Answer

SFHs are not necessarily better suited to ride out a downturn than MFH - it depends - but they have more exit strategies and don't concentrate all of your exposure into one geographic location (unless you own all the houses on the block). Even in a downturn, people need somewhere to live, and what tends to happen is classes move in both directions. First, a bunch of people are devastated and end up stepping down in their ability to afford housing - so a lot of C/D people end up homeless or sharing facilities with others, while former A/B people end up down in B/C/D housing. Second, those who have not been devastated can take advantage of greater inventory and falling prices to move the other way - so people who formerly could only afford C housing now end up renting B housing. This usually happens in tandem in any disturbed market, but depending on the nature of the market one direction will prevail. So, if the owners of "A" housing refuse to lower their rents, there will just be a whole lot more vacancies at that level; conversely, if every level lowers rent rather than eat vacancy, the housing at the bottom of the barrel will suffer more vacancies, as those that can afford to move up, while those who would have otherwise occupied this housing still can't afford even that.

MFH generally only has other investors as an exit strategy, and good investors want steep discounts in bad markets. SFH can sell to other homeowners, or even if it has to go back to the bank you lose one unit instead of 12 or 20 at once if you lose your MFH.

Steve K. · Answer

Exactly. You nailed it and the only thing I would add is that if you're looking at location strictly through a recession-proof lens, the most important thing would be number of jobs in healthcare, federal government, education, IT, insurance, utilities, and other sectors that still do well in a downturn. You want a growth market but not one that is boom and bust.

Taylor L. · Answer

A lot of investors did not lose everything in the great recession. The thing is, you don't hear about them because no reporter is going to run a story saying "This particular investor did not lose money."

As you've identified, being appropriately leveraged is very important and is one way a lot of folks lost during the Great Recession. There were a lot of 'investors' who were really just riding the appreciation wave which eventually stopped.

Cenddie Alaban · Answer

@JD Martin I've listen to Bigger Pockets podcast show 243 and I'm glad that you were successful even though I consider your investing journey atypical. You tried construction instead of increasing your portfolio thru typical means. That's very encouraging since I'm going that route too. Not construction but hiring a property manager at the get go. Putting down payment instead of BRRR. Atypical of our group here in Chicago. Our group also encourages to pay down the property faster by using cashflow but I think the theory of cashflow recycling will be my preferred method. Thank you for sharing all those mistakes, it's actually encouraging.

Thank you again to @Luciano A. and @Steve K. for additional encouragement and advice.

Luciano A. · Answer

@Cenddie Alaban

From someone who seen a lot of people crashed and burned back in 2008 with FOMO. I would advise you just to be patient. The hardest thing to do when you see everyone buying and talking about the home run they just scored but a disciplined investor should use common sense and numbers, not emotion. Hang in there. Real Estate is a long game so you have plenty of time to score. Use this time to crunch numbers on deals you see and practice as if you were buying. With this practice you will come across a deal that you will know is a winner without hesitation.

Best of luck

Adam Polignone · Answer

A lot of people made there fortunes in the Great Recession! The folks that leveraged multiple properties after the 70% drop..

In Vegas properties in Summerlin and Anthem were selling for 150k in 2009-2011 and they’re selling in the 500’s today.

If you could manage to scrape up 90k as a down payment on 3 properties. (20%) you would have 1.2M in equity as of today as well as around $4200 a month in cash flow on the portfolio.

Now take that scenario and scale it to People with BiggerPockets (pun intended). They made fortunes...

Momi Rapozo · Answer

@Lynnette E. Great explanation!

Why the market crash pummeled millionaire & successful investors

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