Buy & Holders- Concerned About the Predicted 2017 downturn?
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Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
9yInteresting discussion. Would love to hear some responses from people who went through it in 2006-2008.
I currently have a few long term buy and holds but I don't plan on selling. The reason being cash flow is king. Value varies. As long as you cash flow enough to absorb a decrease in rent, then just keep on trucking.
Now if I had 100 SFH's cash flowing only 100-200 / mo with current equity less than 25 percent. I'd be nervous. 50 percent equity at 100-200 I rest a lot easier. Or cash flow 300-600 a month with less than 25 percent equity, I'd be comfortable.
If market down turn occurs, rents may decrease or vacancy may increase. This can be argued but many claim this occurred in 2009-2013. So I'd just want to be prepared against it.
If you tell me my house is worth 50k or 500k, doesn't matter so much to me, if I'm not planning to sell it and it's putting 500 a month into my pocket.
70 Replies
- Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes9y
CNN has a good report in
Why not to panic on rising mortgage rates - Real Estate Agent · Austin, TX · Member since 2014 · 636 posts · 486 votes9y
I love this thread and reading everyone's view on this. I'll add my two cents:
In my local market (Austin, TX), I expect a reduction from the current white-hot craziness to simply a good market in the next few years. Supply is finally being built at a high enough scale to service the demand in the area, which should smooth things out eventually. But you probably don't care much about my local market.
At a macro level, those of us who already own a number of properties that we're not interested in selling are sitting pretty. Yes, mortgage rates are likely to increase (due to a number of factors, not just the fed) which may reduce property values over what they could have been, but since we already have our (hopefully) fixed-rate mortgages locked in, it doesn't affect us. The overall cost to new entrants to the market is the same, whether they pay the extra to the mortgage interest, or to the housing cost.
We'll see how much of what he's promising he is actually able to accomplish, but much of Donald Trump's strongest rhetoric is towards inflationary policies, which is great for those of us who are highly leveraged and have a large percentage of our worth in capital assets. He's promised a cool TRILLION dollars over 10 years in infrastructure spending, which should speed up inflation, no matter how hard the Fed tries to curb it. That, combined with his promised immigration policy is very likely to increase construction labor costs (which are already quite high at the moment), which will further constrain supply. All these things are a perfect storm for the leveraged buy-and-holder; the amount we owe inflates away faster while the value of our assets increase at a faster rate. Just be prepared to up your rental increases to keep up with dwindling supply and higher inflation.
- Springfield, VA · Member since 2016 · 1 post · 0 votes9y
I was thinking the same thing. However, in my quest for answers, I realized that if the market falls, more people will lose their homes. In turn, those people will need somewhere to live, which is why rental rates will remain the same or go up.
- Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes9y
Originally posted by @Jeff B.:
CNN has a good report in
Why not to panic on rising mortgage ratesHaven't we all learned that CNN is not a reliable news source?
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes9y
Keller Williams corporate does a lot of research and is talking about a market shift for a year now. Agents on both coasts have started to feel it sooner than we did in the Midewest. Personally I think we might be looking at a softer year because we start seeing some buyers fatiuge that gets amplified by rising interst rates. But as long as the makro economic indicators point in the right direction we are not going to be not anywhere as bad as we have been 6 years ago. On the stock market we would call it a technical correction - and they are like thunderstorms: the hotter the days before, the bigger the storm. But that's a regular market cycle and nothing I am personally worried about, just in the contrary, it provides great opportunities to buy.
The argument the a single family portfolio is more risky than one large multi family is nonsense. It only holds true for a lone SF, because then your vacancy is 100%. As soon as you have 2, 10 or 100 they support each other just like a MF. On the other hand my SF portfolio has a mix or loans and lenders. The 30 year fixed rate mortgages anchor the portfolio and provide risk mitigation to rising rates. A MF has only one loan and one lender - if that lender decides to call his note due you better have a good plan B.
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes9y
Here is the thing, are we looking 6 months out? or are we looking 10 or 20 years out?
We just put a property under contract in Dallas, and hope to close by mid January on a 30 year note at 4.0%. By BP standards, the numbers probably aren't there in terms of Cap rate, or the 1% rate. maybe a year or two from now the property could be underwater, but I guarantee I will be very happy with a property carrying a 4.0% note 20 years from now in a 5 or 6% (or more) inflationary market.
I do think Dallas seems to be cooling off, and maybe we see a little retracement of property values, and maybe the coasts have a greater risk of a larger drop in values. But as long as the long term fundamentals are strong, ie in the case of Dallas, people are still moving to this city, and millennials will be forming households, I would think property values and rents would go up at a pace faster than inflation. I think its a good time to be a long term owner.
IMo the biggest risk to the real estate market are interest rates, and if those go up a lot, there will be people needing to rent who cant otherwise afford a mortgage.
In the next 12 to 18 months, I want to get the properties sold we think we would like to sell and get a good cushion of cash reserves so that we can be in a position to react to a downturn.
- Investor · Coconut Grove, FL · Member since 2016 · 38 posts · 6 votes9y
what has been the experience of some of the folks whom live in areas which have had high condo development over the past years like in Miami, here most developers are stepping off new condo development and holding out or have converted to rental.
My question specifically is did you find in the last cycle that when the condo market had a glut, developers tried to rent out their units on the cheap and if so did that affect the mom and pop multi family units that are always on the market. The "rental" buildings, older properties that lacked the luster and amenities of these new condo buildings. Of course these properties developers built are not designed to be rental buildings so eventually they will go condo or will sell off the units the question is during the cycle of the downturn do mom and pop investors get slaughtered because they have to compete with these awesome new units
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Hey Bart I recently read an article that you guys lost a ton of police there because the pay is so low and that could impact crime and values for the area. Are they turning that around?
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes9y
Some very interesting comments and definitely and interesting topic! Thanks for starting this @Jay Helms
I am a LONG TERM Buy and Hold Investor in the Brooklyn, NY area. I have been holding onto properties since 1997 and I have bought 3 properties within the last 2 years. AND, I will probably buy 2 more properties in 2017.
Since 1997, there has been MAJOR Economic Corrections, including the NASDAQ Crash in 2001 (loss of 66% of the entire NASDAQ Market), 9/11, and the Great Recession. So I obviously have been through ALL of that.
I agree with the general sentiment here that Interest Rates have only one place to go, and that's up. In fact, I closed 2 weeks ago on a $1.71 Million 3 Family where the Interest Rates jumped from 4.375% to 4.75% in just a matter of DAYS. But that's more inline with Trump's election as just about every Bond Trader knows that Bond Prices will fall (thus raising Interest Rates) as the incoming administration primes the economy to increase inflation through policy. During this time of Bond Price Correction, one of my Investment Partners received a $967k Mortgage, 30 years fixed, JUMBO, Investment Grade at 4.625% (discounted from buying down the rate slightly from the 4.75%). However, Rates just days before the election was around 4.25%. That's a HUGE jump.
I also want to point out that the Feds don't drive the Long Term Mortgage Interest Rates. (Funny though, the Treasury used Quantitative Easing (QE) which acts as Bond Buyer to keep Rates low to allow the Housing Recovery). Long Term Mortgages are pegged more towards Long Term Bond Prices and 10 Year Treasuries. So follow these Markets to know what's happening to the 30 Year.
Follow the Feds Fund Rates to follow what's happening with your HELOCs and ARMs, however. This is important as a lot of Home Owners and Investors took out these kinds of loans. If they did in your neighborhood, you maybe adversely affected.
Since we ALL seem to expect Rates to Rise, I would like to give my opinion on how to prepare for it.
There are several things you need to do.
- Get LONG Term FIXED Rate Mortgages NOW.... this is EXACTLY why House Hacking is the way to go if you are a long term Buy and Hold Investor like my Partners and I. House Hacking allows you to get 30 year fixed Primary Residential Loans. That's why I chose to Partner as long as the Partner can qualify to buy and live in the Investment Property. The low 30 year fixed Rate Mortgages are the best hedge against rising inflation. If you can't House Hack now... you just don't have the right partners or Strategy (such as adding capital to the Primary Resident Partner while you are the non-Occupying Co-Borrower). The current interest rates, despite the quick move up, is still low and will not last for long, probably will remain under 5s for a year. Refi into Long Term Fixed Rate as well if it's not a purchase. I've Refi'd all my properties and bought new ones with 30 year Fixed, low interest loans. Great protection against Rising Interest Rates!
- KNOW YOUR RENTAL STABILITY. After ensuring that your largest expense, the Debt Service is completely secured from rising by locking in your long term low Interest Rates, you need to make sure you are in a Stable Rental situation. Like Billy Joel sang a long time ago about Allentown, PA.... "We're Living Here in Allentown... and they're closing all the Factories down..." You better know what will affect your Rentals. There are tons of examples that illustrate this, including Detroit which was 90% dependent on Domestic Automotive. Basically, IF YOU ARE INVESTING IN A ONE INDUSTRY TOWN (or few industries), you better know how this industry is going to fair or you will get killed in the downturn as the Industry sheds jobs. I am completely protected from the large amount of Industries that NYC has that it would take a Massive Economic upheaval greater than the Great Recession to bring my rentals down. Vacancy Rates are around 3%. It's incredibly difficult to get better protection.
- LOW Unemployment is a signal that a Recession is around the Corner. When Unemployment falls to a very low level, there's only one way to go, UP. Rising unemployment leads to loss of GDP which is why we wind up in a recession normally defined by a Fall in GDP, 2 consecutive quarters in a row.
- When (not IF) we go into a recession, you better know who will be laid off first. Generally, low income earners get cut (you would think they should cut the Fat first, but that's not true), especially whom a business has no dependency on and can either increase the workload on the remaining employees or automate. We already know that companies like Uber will start to automate their Car service business. So know who you are dependent upon for your rents. This is probably the most important part of your business. Anyone can run a Business when everything is going well. As Buffett says, "When the Tide Comes in, All Boats Float." But where the CEO (and you are the CEO of your Investment) earns his money is by sealing up any leaks. Get rid of potential Cracks, buy water-tight Investments. I just bought a 3 Family Brooklyn Investment. I just places a tenant. They didn't have extremely large income which would have been required (45 x monthly Rent of $3k), but they had $200k+ in their Bank Account in CASH. So they are qualified. You get these kinds of renters in NYC in good neighborhoods. Again, protection against Market downturns.
The above are my recommendations from Experience.
Now, it seems like there were a few comments about places like NYC being vulnerable to a downturn. The reality is that a lot of statistics use METRO Centers. Robert Shiller's Home Price Index NY Metro Area, probably the most popular of all the Home Price Indexes includes: New York–Northern New Jersey–Long Island, NY–NJ–PA. Real Estate is really a LOT MORE LOCAL than that huge area. So take these statistics with a Grain of Salt. Even within NYC there are differences in Neighborhoods that react differently in Economic Downturns. So you really need to be very specific in high densely populated places.
The Reality is that in my area of Brooklyn where I invest, a lot of properties were bought with ALL Cash. Also, because Conforming Loan Limits for a single family home is $625k for a single family where most of the SFHs are well over a million, there is a large amount of Equity that are going to protect these kinds of properties in the next downturn. However, you need to know if other home owners have used higher leverages in your area. If they do, then your area may become vulnerable to price correction.
You should be very aware of increases of Foreclosures. Mainly because it's a big burden on Cities. There is normally a priority on Cities cutting down on services. It GENERALLY (but not always) is cut in this order: Fire Dept, Police, Teacher, Sanitation, etc. Cities that do this worsen the problem for you if you are in low income areas. Basically, those areas cannot protect themselves as well as higher income areas which will pay for security once the Police Services get cut. As crime rises, those who can afford safer places will migrate towards those safer places. This basically creates extreme neighborhoods. High Crime Neighborhoods get higher and lower income gets lower while quality neighborhoods hold their price values. That's exactly what happened to my properties. Hardly any change in Value or Rental.
There is no doubt.... there has to be a correction somewhere. If Wages don't increase along with Inflation, this will be a bad correction and cause any of the above to be even worse. If Wage Inflation happens, and we really do hope it happens, then your Rents will definitely help you pay down those Fix Rate Mortgages incredibly fast!
The Reader of this post should do their own investigations and know that the only you can guide your Investments. You are driving an Investment Vehicle..... so you must look out the Windshield (to see what's in front of you) all the time. It will help you avoid obstacles and stay safe.
Investor Llew
- ., VA · Member since 2012 · 60 posts · 19 votes9y
Buy based on the deal.
Most will not have any luck trying the time the market.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Llewelyn I have the same mindset regarding quality areas.
I do not buy in the marginal to bad areas no matter the price for commercial. Planning on an area turning around is gambling not investing. That's okay if you are taking 10% of your overall portfolio and having a if you win big or lose it all it will not change your financial position being such a small play for the investor.
Example someone is worth 2 million and buys in a crappy area for 100k hoping to turn into 200k if it turns around. 1 year later the property did not turn around and is worth 50k. They take a loss but easily made that up with their other investments in better areas.
I agree about the one economy towns. Typically rural to weak suburban are first to get hit hard by a down turn and the last to improve during an upturn. Those areas are more suited to local investors only that understand the intricacies of those small towns and how to still stay profitable as an investor in the tough times.
Strong suburban to urban core in major metros tend to feel the affect less then the outlining areas except for appreciation only type driven markets that can have larger swings in value.
Quality assets in quality locations is key. I am not a believer in cash for trash type properties in junker locations. Some investors start out there because of their beginning financial position but if investors can avoid that to start it is better.
- Broker, Investor, Property Restorer · Fox Point, WI · Member since 2012 · 288 posts · 120 votes9y
Downturn??? Is that the real estate downturn, or the oil downturn, gold downturn, silver, hog bellies or whatever they're trading an hour or so south of me in Chicago . . . and of course for all of those downturns, you can find the exact opposite predictions from SOMEONE for anything and literally you could spend all of 2017 watching non stop youtube videos, listening to "financial whiz" podcasts and interviews, there's the screaming "I'm bald but refuse to do the shave your whole head trend since I'm too busy screaming about stocks all of the time" stock dork on CNBC or wherever he is (maybe MSNBC-oh wait, they've got the entire on air staff on 24/7 suicide watch since the election results came in at MSNBC)
Anyway, point is that you can literally find someone pushing ANY prediction and what is also very troubling is that MANY who push the "downturn" scenarios and ESPECIALLY the "major downturn" or even the incredible # of "global economic collapse is any day now, might even be tomorrow!!" fear mongers and sadly, they're quite often just by coincidence also selling you the PERFECT investment to get into!! SCAM! (although getting our a$$es $20 TRILLION in debt and still doing constant promotion of a "we'll pay for that now too!" to more and more Americans for more and more stuff is financially and economically INSANE!! Yet, I'm not ready to load my camper van up with MREs and go park in the North woods or somewhere in Manitoba quite yet!!)
I certainly keep an eye on MANY financial indicators and have my bachelor's degree in accounting (right before most or all states changed CPA exam and thus accounting degrees to a 150 credit endeavor) so I know my #s well, but no one has a crystal ball yet as far as I know! - Investor · Milford, CT · Member since 2015 · 200 posts · 69 votes9y
Timing the market is a fools errand.
Quite frankly I'd love a correction to drive all the newbies out of the market. I miss the days of being able to go to an auction on a sat and grabbing a deal. Now every HGTV expert bids against me and drives the price out of site; I'd love to see them slaughtered by a downturn.
- Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes9y
@Jay Helms, interesting question. I started buying real estate in '03(the beginning of my RE career,) and bought until the end of '05. I stopped buying between '06 and early '09 because I thought things were a bit frothy. I used that time to optimize systems, improve management, and build up capital for better times.
Those times definitely came in '09. The teams I'd built were then capable of dealing with all of the distressed assets that began hitting the market, so I dove in head first, and acquired very aggressively between 2009 and the end of 2014, quintupling the size of the portfolio I'd built between '03 and '05. All of those purchases were moderately to severely distressed assets- mostly foreclosures, with a dash of short-sales thrown in and a smattering of approximately half-occupied properties for good measure.
Since the end of 2014, I've been marshaling resources again, just like I did in the '06-early '09 period. I'm back to system optimization, investing in water and energy efficiency, and investing in people. But I think we face a very different landscape in '17 than we did at the end of '07 or '08. Back then- before the fit hit the shan- the average person thought real estate could only appreciate in value, and people paid all sorts of crazy for a stream of rental income. When sentiment changed, no doors were big enough to allow the herd of sellers to stampede through the exit without a significant portion of them being trampled.
Now, we have a more measured market stress on our hands- Yellen gradually tightening the screw of interest rates- and we lack the universal sentiment that real estate can only increase in value. The former is generally a result of improved economic conditions, so I believe expectations are that a gradual rise in rates will have minimal impact on real estate. The absence of the latter is a good thing for everybody, and we should all be thankful that the bloom is off that rose.
Of course, we also have the wildcard, the elephant in the room...yes, you guessed it! There will now be mixed doubles in the curling event at the 2018 Winter Olympics. Kidding- of course I'm referring to Trump. Will he be good for the broader economy, or only his own economy and that of his cronies? Will Trump and Putin usher in the Armageddon in 2017, or will we have to be patient and wait until 2018 until the Apocalypse arrives? Or...what if, contrary to all reasonable people's expectations, Trump actually does a good job? Stay tuned! I'm expecting 2017 to be a real white-knuckle ride.
John (while writing Revelations): "So Lord, the end will be signaled by trumpets?"
God: "No... I said Trump/Pence."
John: "Yeah, trumpets."
God: "Never mind. They'll know."
- Dallas, TX · Member since 2016 · 1k+ posts · 745 votes9y
Originally posted by @Joel Owens:
Hey Bart I recently read an article that you guys lost a ton of police there because the pay is so low and that could impact crime and values for the area. Are they turning that around?
There is a major major issue with the police force because the pension system is likely headed for bankruptcy. Dallas (proper) has lost about 100 officers in the last 90 days. It is a real epidemic.
Frankly it had been happening for a while, Dallas itself has some issues financially because of the pensions, and the infrastructure/roads are in terrible condition.
I do think the crime rate will get worse, but I think the mismanagement and issues with the police department compensation and pension have been bad for a while. There has been real attrition to neighboring cities for a couple of years.
Also there was a major change to the landlord permitting rules in the city, I am still researching their impact, but basically it requires a city inspection and remediation on rental properties, there were a thousand or so people who were originally given eviction papers from just two or three landlords who specialized in low income housing. Supposedly they were going to stop leasing several hundred homes mostly in west Dallas south of the Trinity. I would be VERY careful stepping into low income properties within the Dallas city limits without knowing the lay of the land and how the new regulations will affect property values and rental cash flows.
I personally am still investing in the city limits, (currently have a house under contract), but we did sell our duplex and depending on whether the current tenants renew, we may sell one of our houses in the city since it has had a great run in terms of price appreciation.
We have begun to research neighborhoods in some of the smaller towns surrounding Dallas, I think there might be some opportunities for BRRR with lower cost SFH's. I think higher priced SFH rentals will be fine in Dallas A/B neighborhoods. I would be less sanguine on low income class C or D neighborhoods with houses that need work, and I would be a little nervous with MF apartments, there are a ton of those going in .
- Rental Property Investor · Boston, MA · Member since 2015 · 19 posts · 23 votes9y
Originally posted by @Jack B.:
Why not cash out refi and wait for buying opps, thus dollar cost averaging? This seems to mitigate the risk well. If your properties keep going up, then no worries. If they go down, you have tons of cash to double or triple down on more properties. When they inevitably bounce back, you'll still be much better off than before.
Good stuff Jack! I have the same strategy in mind. Submitting the refinance paper work tomorrow!
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