What are your strategy to survive coming crash?

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Ali Boone · Answer

A bit of a late chime-in, but my input is that if you have a fixed loan, a crash doesn't matter for the owner AT ALL unless it causes rents to go down significantly. The value of a property doesn't matter, even if it goes underwater, unless you are buying or selling. So the sitting value of a property is irrelevant, so a crash doesn't matter. If the rents stay the same or only go down minimally, and your loan is fixed (i.e. not an ARM and with a possible substantial increase in rate coming), then who cares? If your rents drop significantly and you suddenly can't cover the mortgage and expenses, then that's really the only risk I see. I don't see anything about how much you are leveraged or anything as long as all the leveraging is fixed rates. I'm also with the other posters about the smaller likelihood of rents dropping significantly. It can happen of course, and that's why it's important to always be sure you are buying in growth markets and not declining markets, but I don't think it's a humongous risk in most markets right now.

Andrew Johnson · Answer

Account Closed I don't really have a "crash survival strategy" but I probably have less leverage that a lot of people on BP when I look at my portfolio.  We still have a healthy (non-REI) income that could be used to support underperforming assets in the event of an REI apocalypse.  I could lose a decent chunk of rents and still meander along, break even, keep paying down the mortgage, lose money on paper, etc.

All of that side, I think there's a material difference between thinking there is going to be a cyclical correction and a legitimate "crash".  In a real crash, well, all bets are off.  All of the strategic planning in the world doesn't really prepare for the emotion of what's happening.  It also can't prep for you when to get back in and try to "catch the falling knife".

But let's look at your idea around the coming crash in 2-7 years.  For all I know the market could keep increasing for the next 5 years and then "crash" back to 2017 (current) levels.  If it goes up 3% a year for the next 5 years (not counting compounding that growth) you're at a 15% increase and if the market drops 20% it will barely move the needle as a loss on today's 2017 values.  Or <gasp> it will crash back to 2015 levels!  Or maybe it goes back to...well...who really knows...

Mike H. · Answer

What are you defining the crash as? Is it property prices and rents going down? Is it prices remaining flat and rents going down?

As a buy and hold investor, I don't know how much I care whether my prices go down. If they go down some, maybe my taxes will remain flat or go down some. I do care if rents go down a ton. And I care if prices do as well to some extent given I have some portfolio loans that will reset.

But even in that scenario, I'll be around 60% LTVs or better on most of my stuff when they come up for renewals. So if prices were to drop, I still have some cushion. And some of my portfolio loans are now going to ARMs that automatically renew after the 5 years and just reset the rate based on some variable (i.e. Libor or Fed rate).

But I'm just trying to see in what scenario people believe the prices of homes will drop AND the rents will drop. To me, you can either have one or the other. Either prices go up and rents drop (people buying more houses instead of renting drives prices up because demand to buy is higher and lowers rents because less supply of renters). OR prices go down and rents stay the same or go up.

During the bust, we had that a little. A huge recession caused prices to plummet but it also caused rents to remain somewhat flat - at least during the first few years - as huge numbers of people lost their jobs and couldn't afford to pay rent.  And then all these owners that got foreclosed on became renters and rents are still shooting up.

But, to me, the more likely scenario is that prices go down and rents stay the same or go up because people don't want to buy and if they don't want to buy then they'll rent.

A good example of that is the new tax bill that trump is getting ready to release. He's going to eliminate the property tax deduction completely. So that makes owning a home more expensive and therefore somewhat less desirable. Its one less reason for some of these people to own. In areas like Illinois, you're looking at deductions of 4k or 5k to 14k to 15k.   Thats the equivalent on your refund of 1k to 3k......

So that will mean less people will buy homes. But those same people will become renters so rents should go up.

Its going to have more/less effect based on the area obviously too. Areas with high property tax rates will see less demand for homes.

But one other thing I'd mention that people still don't seem to be including in their doom and gloom scenarios with housing. There simply isn't enough housing stock for the number of people we have. And we aren't building enough housing stock to keep up with growth - at least not in most areas by me.

New construction homes are too costly to build and most people don't want to pay that premium. Labor and materials have really shot up over the last few years and I don't see that being fixed any time soon either.

So until new construction starts kicking in to provide the supply of homes we need, I don't see any way that prices or rents can drop in the areas I'm in. I could see prices dropping in some of the super hot areas in other states (i.e. california, arizona, etc) to where salaries simply can't keep up with mortgages.

But there just isn't anything out there that is going to cure this lack of supply of homes any time soon. And any time you have lack of supply of anything, you very rarely see the price of that item drop.....

To give you a frame of reference. The towns I'm in here in illinois are several towns with populations of 7k to 15k.  When i first started doing this 10 years ago, these areas would have anywhere from 5 to 15 houses to rent at any given time.  Now, there are times when I have the only rental (house anyway) available in town. And typically, there are only 2 to 5 houses at any given time and they don't last long.

Colin Simon · Answer

That's a real long recession. Of course the worst one since 1929 was the last one, and then the actual recession part took about 18 months, which was considered pretty long. Other recessions are incredibly short but painful (e.g. 1987 black monday stock market crash), in which case typical investors who have money in the stock market will be completely unable to cash out faster than computer algorithms.

Of course your strategy to refinance cash out could potentially set you up to buy a lot of properties at rock bottom prices, but it could also mean your properties go "underwater," and I don't even know all the negative effects there.

Colin Simon · Answer

@Mike H.

Factors that could drop rent:

-People moving from big cities to smaller, cheaper cities (this is happening)

-Millenials deciding to move elsewhere, live nomadic lives in vans: https://www.vice.com/en_us/article/yvxj9w/living-o... (this is happening)

-Cities caving in to pressure and responding by reducing zoning restrictions and taking other creative measures to produce affordable housing. In Colorado right now, politicians are running on affordable housing platforms.

Will rents go up despite those factors? I don't know!

What are your strategy to survive coming crash?

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