Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
@Joshua D. , I wanted to ask if you could put together something structured (podcast, extended thread, book, etc) about the 07-08 real estate crash. A lot of us got burned badly during that time so it would be great to assemble something concise and specific that has stories and advice from investors that survived (or thrived), in spite of the crash, that we can use as actionable steps to fortify our current business plans.
Right now I'm only doing flip projects because it limits my risk. I'm in and out of a project in 3 to 4 months which means I don't have to worry about major market corrections.....but I really want to buy and hold some properties. I've heard a lot of stories from people that "had it made" with enough passive rental income to spend their days on the beach or the golf course, that eventually lost everything when the market collapsed.
I don't want to spend 5 or 10 years building up a portfolio of properties only to see it obliterated by a serious market correction. My business model wasn't prepared for what happened in 08 so I had to close my investing business and fall back on my engineering degree. I want to make sure that I"m smarter this time around so that doesn't happen again.
What do you think? How about the rest of the BP community? Do you want to participate in this kind of thing? I can offer some advice on how NOT to structure your business (for anyone that's not sure how to fail) but it would be great to hear from those of you that did well during that time....especially those that held rentals. I would really appreciate it. Thanks!
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
13y
Very simply almost all of my investments since 2002 were purchased with no debt so I was easily able to ride out the market decline. Being in this position allowed me to raise capital and purchase assets at a significant discount in 2008 and 2009, some of which I held and some of which I sold at a profit - too early as it turns out.
It is said that every general fights the last war. So it is with investors. Stock market investors who remembered the 1932-1938 depression were unable to take advantage of the boom markets that followed. Seems like @Michael Woodward memory of 2008 is not allowing him to reap the long term benefits of holding real estate.
Leverage can magnify both profits and losses. But the decision is not merely one of expected value; very possibly financial losses may be more painful than financial gains, making the decision for those people one of ultra safety and hence ultimately a lower net worth than those whose decision process is less "emotional".
I see the risk of inflation must greater right now than the risk of deflation, hence I am in the process of strategically "leveraging up" on my real estate holdings. probably not as much as I should as I too now consider losses more painful than gains - as i have reached 60 years old and have no desire to step backwards in risk of out sized gains.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
13y
Very simply almost all of my investments since 2002 were purchased with no debt so I was easily able to ride out the market decline. Being in this position allowed me to raise capital and purchase assets at a significant discount in 2008 and 2009, some of which I held and some of which I sold at a profit - too early as it turns out.
It is said that every general fights the last war. So it is with investors. Stock market investors who remembered the 1932-1938 depression were unable to take advantage of the boom markets that followed. Seems like @Michael Woodward memory of 2008 is not allowing him to reap the long term benefits of holding real estate.
Leverage can magnify both profits and losses. But the decision is not merely one of expected value; very possibly financial losses may be more painful than financial gains, making the decision for those people one of ultra safety and hence ultimately a lower net worth than those whose decision process is less "emotional".
I see the risk of inflation must greater right now than the risk of deflation, hence I am in the process of strategically "leveraging up" on my real estate holdings. probably not as much as I should as I too now consider losses more painful than gains - as i have reached 60 years old and have no desire to step backwards in risk of out sized gains.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
13y
I didn't start investing until about the last 2 years of the boom. I flipped one house and built one spec house - which had to become a rental, although it is cash flowing $200 a month.
But my one comment about your post is that you said that there were buy and hold investors who had enough cash flow to retire yet they ended up going bust.
I don't see how thats possible unless they had more irons in the fire than just their buy and hold. From my experience, rents have gone up quite a bit since the start of this bust. So if they were getting excellent cash flow before, they should be getting even better cash flow.
And, with the huge drop in rates, they should have been able to refi some of their properties to free up even more cash flow.
I would have to think that anybody that was set with cash flow from buy and hold property would have made out like bandits in this housing cycle/downturn. To me, the ones that I'm guessing lost their shirts are the ones that were buying homes for appreciation and that had no cash flow so they ended up going back to the bank as there was no exit strategy left to them. Or maybe for flippers/developers who got stuck with a handful of homes or land that they couldn't sell or develop.
I would love to hear some feedback from some of the more senior buy and hold investors to see if any of them actually did get hurt by this downturn. And if they did, what were the investing principles that got them in trouble?
No cash flow and were counting on appreciation?
Overextended and got stuck with houses they couldn't sell and couldn't continue making payments on?
Or are there actually some investors out there that were making 6 to 10k a month from their rentals that lost it all? If so, HOW?????? Did your rents go down? Did you have a run of bad tenants and major trashings? Could you not find any renters? Maybe because they were higher end homes that people could no longer afford to pay those kinds of rent amounts when the econ turned?
I would love to hear from the buy and hold investors to see if and how any of them might have lost in the downturn. But, I'd also like to hear if any of them made out like bandits too - i.e. by refinancing into better loans, raising rents, etc.
I have been actively investing, developing, managing, and financing real estate since the 1960s. I am following in the steps led by my grandfather and father before me. I have listened closely to what they have recommended and attentively observed their actions. After all, my grandparents survived the Great Depression, WWII, and the Dust Bowl - they were farmers and ranchers in the Texas Panhandle. My father also lived through the Great Depression, WWII, and the Dust Bowl. All survived and all thrived.
I am only a long-term investor.
Primarily, I was taught debt could be very destructive and make achieving success much more challenging. If debt is part of the strategy, it should be well within reasonable limits, well managed, and very well respected. Debt can be the attractive shinny thing that brings down your world.
With the lessons learned and the philosophy understood and put into practice, it has made it much easier for me to survive the many regular ups and downs experienced in the real estate market.
There is at least one down real estate market every 10 years since the 1970s. The volatility has become much more radical with each passing down period.
Yet, since I own all of my properties debt-free, depressed real estate markets are not a challenge. I have the flexibility to adapt, remain profitable, and live life stress-free.
Moreover, all my properties are what I refer to as Chevy properties. In ALL economical times, there are more buyers and renters for Chevys than Caddies. My target market has always been the Chevy buyers and renters.
I would not consider taking on the amount of debt or stretching my credit limit or buying power as much as many lesser experienced do. I enjoy living live stress-free.
Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
13y
@Mike H , I suspect that those investors bought with adjustable rates, which started off cash-flowing nicely. They probably figured that they'd refinance or sell before the rates got too high. And when the market crashed they couldn't do either and the rates increased above profitability . Just guessing
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
13y
Many of the smartest and most successful people have lost it all at one time or another. The saying goes that it is the same personality traits that made them rich is that make them go broke.
Ego plays a huge role in the failure of some of the big timers. If it just becomes a contest of how many places you can buy or how much the bank will loan you then there is an accident waiting to happen.
The fact is if you want to grow you have to take risk. Once you reach a certain age it makes sense to be able to survive in a worst case scenario.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
13y
Sure avoiding negative cashflows and bad long term loans (variable, balloon, hard money) are important, but an equally important factor in surviving RE crashes is where you buy. The 07-08 crash in the Bay Area played out as predicted, like a ripple effect emanating from the prime center. The very best locations- most of SF and prime towns/neighborhoods in Silicon Valley and San Mateo counties fell 10-20%. Other good areas of Silicon Valley and East Bay fell about 30%. Going outside of the Bay Area we're talking -40% and onwards.
And not surprisingly, the best areas are the first to jump back in values. In my case I invested in a gentrifying SF neighborhood (Mission district) and even I was surprised at the appraisals when I refinanced two condos last month. They actually came back higher then I expected. So now my properties are at least 10% over their 07 peak.
My experience in the Bay Area has shown me that prime areas are the last to fall, fall the least, and rebound the first. And that has a huge cumulative effect on appreciation.
Like many investors, the 07-08 crash was challenging. I got stuck with a gutted triplex and no loan options for renovations in 08. I was able to sell a unit to family for a discounted price, and used the cash from the sale to renovate the entire property. I sold them that unit for $350k, and later this year I will be finalzing condo conversion on that property and their condo unit will be worth $650k, so it turned out a sweet deal, and now my dad plans to give it to my sisters, so they have some security in their lives.
Another saving grace was that rents skyrocketed in SF from 2010-2012. Several of my rentals went up 30%, so having that wind to my back helped during that timeframe when the banks were barely lending (even to qualified people like me.)
With strong positive cash flow I basically treaded water since stabilizing that triplex in 2010, until earlier this year when I was able to refi and separate a former duplex to condos, as well as lock in 3.75% 30 year fixed rates, which is godsend. Now I am in the midst of refing the triplex, I plan to access some of my equity and pull $500k as I would like to buy 2-4 units in SF. With these low fixed rates it's a no brainer if I can even get close to break even. I normally buy properties that need some work and have upside, so I will be busy bringing it to higher and best use. Should be good times ahead!
Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
13y
@Don Konipol , You mentioned that you bought your investments since 2002 with no debt....that means that you paid cash for them, right? If so, how did you reach the point where you had that much cash available?
You also mentioned that your high equity position allowed you to raise more capital to leverage. Since everything I do right now has to be leveraged at some level, I'm wondering where the line is drawn that creates a scenario in which I could survive a major market correction like the one we just went through. In other words, if I'm going to buy and hold a property right now, are the "standard" rental evaluation calculations (50% rule, etc) robust enough survive a major market downturn? I know there are no guarantees in life but what I'm trying to get comfortable with is whether or not doing everything "right" is enough to insulate my business from failure. I don't want to rely on "hope" for any of it.
@Mike H. , Your question about how people could fail after reaching a point of living off their business is exactly the question that's bothering me. I know that there are an infinite number of things that people can do that sabotage their business but I'm wondering how many of them were doing it "right" and still got burned. That's why I'm looking for feedback from people that had a "typical" leveraged position in their rental real estate and still survived the crash. The questions you raised are very good. I'm hoping to hear from more of the long-time buy and hold investors in the BP community that can give some input (@Ben Leybovich ,@Will Barnard ,@J Scott , @jon holdman, @Brian Burke , @chris clothier, @bryan hancock, @ann bellamy, anyone else with input....)
@Tom Goans , I agree that once you reach the point of being debt-free on your properties, your ability to survive downturns becomes fairly easy but let me ask the question in a different way because you've got enormous experience at this. If for some reason you had to start your investing business ALL over from the beginning,.....from scratch.....with NO money....... but using only your years knowledge and experience, how would you do it? What numbers would you use to re-create your rental business (50% rule, etc)? If you saw that there was a very high possibility of a major market correction five years from now, how would you structure your finances to weather the storm? This is the heart of what I'm trying to figure out. I don't want to move forward with rental purchases until I feel comfortable with my plan. I really appreciate your input.
@Michaela Graham , @Jeff S. ...thanks for your perspective.
@Amit M. , I think that's good advice to buy in areas where the market doesn't hyper inflate or deflate. I was building new houses in North Port / Port Charlotte FL when the crash happened. Land and houses were appreciating at "ludicrous speed" (google that if it doesn't make sense) until the market corrected. The area depreciated with the same ferocity as the previous appreciation....... EVERYTHING stopped. The reversal was catastrophic. When I moved there in 04 there was a house under construction on literally every street. When I moved back to TN in early 09, there was a house for sale (some only partially finished) on every street.
@Ben Leybovich , I listened to your podcast and read your articles so I know that you're bent strongly toward buy and hold. I wanted to ask you in particular what your mindset is toward preparation for the possibility of another bubble. Are you using only "traditional" financial numbers that work when the market is stable or do you have a "doomsday" plan in place?
We measure the health or strength of our investments in one of two ways - either equity, or CF. A bust generally means that valuations slide - do I care? No, not particularly as long as 2 things are true:
1. CF remains at a level which support debt service
2.The bank doesn't go back and analyze the valuation in order to refi...
Thus, financing wise I do not get into short-term balloons with institutional lenders. Only private, and then I look to pay those off either organically or another way at maturity.
Now - if a bust is defined by rent rates tanking then we are all screwed. This is where it is important to have $100/door bare minimum of CF so that you can go down with the market.
Besides, if there is another bust in SFR market, then more people will need to rent. Even if there is not a bust, the damage has already been done to the psychology of the consumer. There are more renters out there than ever before.
Will that change. Not any time soon in my opinion, and as long as demand remains so will the rental values. As you know, valuation in multi space is a function of NOI, so I am not too concerned. Now, the guys and gals playing in the SFR market should be concerned much more indeed. Everything positive that you are seeing is very artificial and can not last...
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
13y
My rental portfolio did fine during the downturn. Cash was certainly harder to raise and banks weren't really lending very readily so it was hard to take as big of advantage of the downturn as I'd like to have, but it certainly didn't sink us.
As long as you're diversified and not highly concentrated in assets that get mauled during the repression you should come out okay. I am sure everyone suffered to some degree, but the mark of a good long-term investor is someone that has a portfolio designed to weather the storms. Liquidity equals staying power and thus one should maintain it to weather bad markets.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
13y
Michael- certainly by being conservative on your leverage you will have more security. You may gain less in the boom cycle, but your security increases for those down cycles.
Also, I can't emphasize enough to be choosy and smart about your locations. Consider inner city areas experiencing urban renewal. If you can find that it may bring you appreciation in the short term, and you will have built in security as the value and rent increases in the short trem (1-3 years).
Be weary of areas with high investor concentration: they tend to boom/bust, then rents drop, and then owners sell off and it's a downward spiral.
Also keep in mind, our world is changing fast with new technology. And there are clear winners and losers. Seek the areas that are desirable from that perspective as well. Areas with good, progressive jobs give you added security.
Finally, think through how you see the American and global economies play out over the next several years. We had a substantial recession recently. So are we starting to recover or will we go back down? Nobody knows for sure, but you must get comfortable with your won perspective, which will inform your investing strategy.
Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
13y
I own some houses that were bought before the crash that are still upside down. As long as you have fixed rate loans, the rents still create cashflow and they will be paid off after 15 years. (I'm a big fan of 15 year loans).
The people I know who went belly up either had adjustable or balloon loans that couldn't be refinanced, or they jumped off the train while the ride was still wild. Many people figured that since they owed twice what the property is worth, they would "beat the system" and walk away. Now they have bad credit and hopefully the banks will go after eveyone who owes them money. The people I know who lost everything are the same people who can't magnage their money. They are always paying late fees, bouncing checks, and not planning ahead.
The good news is that after the crash, I was able to pick up some awesome deals that are now worth way more. It's just like dollar cost averaging in the stock market. My property taxes have also gone down about $10,000 per year while rents haven't gone down.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
During that period we acquired some of the best foreclosed/tax lien auctioned properties @ prices I haven't seen since.
Judging by the last couple of auctions people are going crazy with their inflated bidding.
We often came away from these auctions with a couple of good buys, but nothing in 3 auctions this year.
Now it's a better strategy to wait until a rehabber gets into trouble & has to unload :)
Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
13y
@Michael Woodward - Wow Michael. You and I must be distant cousins or something. I too am from TN and I too had to fall back to my engineering degree. But it didn't all fall apart for me until 2010. I'm now working a half-time engineering job with flexible hours and I'm back flipping again too. And like you, I'm being cautious. BTW, where did you go to school? For me it was BSME TN Tech 1990 and MME Auburn 1995.
SFR Investor · Denver, CO · Member since 2009 · 184 posts · 55 votes
13y
I was pretty lucky that Denver's rents never fell more than 10% during that time. Values of my single family stuff did fall up to 25%, still less than most of the country. Still, I was suffering and had to sell at least one house per year in 2006-2008 to stay afloat.
I also tried to "fall back" on my engineering degree. I had zero luck there. I had been out of engineering for 12 years, was over 50, and was looking for a job during the worst possible time, in 2007-2008, when unemployment was shooting up to over 10%, even in Denver.
What eventually saved me was that the Denver multifamily market was starting to sizzle in 2009 because large investors couldn't make any money in the stock market, CDs, or anywhere else.
The value of those buildings have almost doubled since 2009. D'oh! But now the SFRs are on their way to doubling.
Ironically, I had and have a lot of ARMs but they have been a bright spot, some of them started at 7% but are now below 3%. They could still give me some trouble in the future, so I'm poised to refinance as required.
Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
13y
Yes. We did not have a clue about all oft eh crazy things happening, but saw house prices going crazy and rents dropping, so sold all but two of our rental houses. The best sales were two in Apple Valley, CA we bought brand new for $150,000 each, and sold them for $300,000 each (to people with no money and 100% loans!). The wonderful book The Big Short reads like a novel, but gives the information on what was happening. It is like a novel, as it focus on several people who nobody believed. It is also the only place I've read how a strawberry picker got a loan on a house in the $700,000 range.
Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
13y
@Ben Leybovich , Yes, that does help answer my question. So far, all of my direct experience is with SFR but I've had my antenna up for multi-family for a few months. I'm still working on systematizing and streamlining my flip business so I haven't had time to spend with the rental side of the business. Before I light the fuse on that rocket I want to make sure my trajectory is right. Thanks for your advice. Your input gives me a lot to think about. Thanks!
@Bryan Hancock , Thanks for your feedback. I'm glad to hear that your business did well in spite of the housing crash. As I mentioned to Ben, my experience is in single-family so I want to at least consider buying some to hold. I also see the benefit of multi-family so your feedback will really help me design the right balance. I just wanted to make sure that the whole thing wouldn't blow up in my face despite the best planning.
@Amit M. , All good points....thanks again!
@Rob K , That's really interesting to hear that even though you're still upside down on some of your houses, you survived. That says a lot about the viability of rentals......and your planning of course. Thanks for your sharing that!
Regarding people that I've read about that crashed and burned spectacularly, the person that really stands out to me is Wade Cook. He was hot in real estate and had several books out when I was first starting up my venture. He was living the good life while his rental business paid all the bills. Fast forward a little over 10 years...... now he's in prison for tax evasion. I think I can assume that he's one of those you mentioned that didn't do the best job with his bookkeeping.
Awesome logo by the way!
@Pat L. , That's more great input! You were a brave man to wade deeper into the market in spite of the crash. I would guess that it was your experience that gave you the confidence to do that. Hopefully I'll be in that position the next time the market corrects. I agree that good deals are really hard to find right now!
@Bryan L. , It's more weird/coincidental than you thought.....I'm also TTU alumnus BSME (1997). The timing of my "restructuring" was also 2010! Let me know next time you'll be in Cookeville or anywhere in E.TN and we'll have lunch. I'm really interested to hear how you've been able to put together a part-time engineering job. I've been trying to figure out how to pull that off. I'll send you a PM. Thanks!!
Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
13y
@Kevin Dickson , What was it about the down market that was making you suffer and eventually sell houses? Did vacancy go up or was it a function of your particular financing?
Don't feel too bad about not getting back into engineering. Sometimes I wonder if I would have been better off toughing it out. Now I feel somewhat stuck.
@Stephen Masek , Do you feel that you were in line with standard rental financials (50% rule, $100/door, etc) or were you leveraged outside of those guidelines.This helps me figure out the between investing risk and market casualties. Thanks for your input.
SFR Investor · Denver, CO · Member since 2009 · 184 posts · 55 votes
13y
Michael,
#1. I got married and had kids, so my personal living expenses increased
#2. I got away from the basics of investing in high cap rates, value add and positive cash flow, and into projected appreciation. (I felt I had found the next hot neighborhood)
#3. After 18 years of success, I wasn't paying enough attention to the balance sheet and expenses.
#4. Denver previously had larger rent reductions caused by the tech bubble bursting in 2000.
Luckily, it finally looks like my neighborhood finally will be getting hot.
Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
13y
@Kevin Dickson , Thanks for your transparency. I didn't realize how vulnerable my business was pre-2007 (when real estate investing was easy) but I found out in a hurry. I think everybody took a step back (some of us right off the cliff) to look for the weak spots in our business models when the market tanked. I'm sure we're better for it. Now it's time to rebuild......smarter....better...faster....
I love what many have added here about the need for the right location. In North Carolina, we never had a bubble so we never had a bust.
That being said... we are very conservative investors. We never buy a property unless we make a profit the day we close.
(1) We buy only properties that have equity.
(2) We buy only properties that will cash flow a minimum $200/month - most of ours start out closer to $400/month. That way, if the market drops (every 10 years is the "norm") we can drop rents as needed - and we have dropped rents in the past.
(3) We're firm believers in multiple streams of income. If you're focused in only one area (i.e. flips, new construction), you can be stopped cold with an economic down turn. During those times, you count more on tenants for your income stream, wholesaling to anyone with cash, private money lenders and partnerships.
We have a rental company, a full service real estate brokerage, we renovate and flip, we wholesale, we coach and train. No matter which area is affected by the economy, the other areas still function to pay the bills.
Multiple streams of income. Repeat after me...
Thanks for your question. You've got some great conversation happening here.
Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
13y
@Michael Woodward - I still haven't fully recovered. In addition to the melt-down of my business, I also bought some multis that are still eating me alive. Not necessarily a function of the market crash. That purchase was a mistake by itself.
Real Estate Investor · Greenback, TN · Member since 2012 · 268 posts · 115 votes
13y
@Karen Rittenhouse , Thanks for your feedback! I really appreciate it! You have an impressive system in place and you've confirmed that following the standard "best-practices" in real estate will (should) result in a very stable and predictable business (almost) regardless of the market. This thread has given me the needed confidence to start adding rentals to my flip portfolio.
