Should I purchase during an oil crash?

Question

Howdy everybody,

This is actually my very first post on here and I am completely new to real estate investing. I have invested much of my time learning how this whole ordeal works but, I still have a few thoughts that I would like to run by y'all.

Since I've started researching, I have knocked out a lot of distractions (watching T.V., video games, Facebook, etc.) to keep me more focused on my goal. I've looked into many different types of RE. To start my journey I want to get out of my overpriced  apartment and into a duplex free of rent. Good first choice? Why?

I live in an oil boom town and right now everyone is hurting for good money with no signs of any prices dropping. I am afraid of purchasing and not being able to fill the other half of the building thus leaving me in a slump. But I guess thats what risk taking is all about, right? Do you think a duplex, with how the market is, is a wise decision for a first investment?

Loren Davy · Answer

Buying something in the Odessa/Midland area is scary right now. Will it keep its value and will you be able to get tenants? If you can find a really good deal, you can buy now; other wise I would wait and see what happens over the next year. Come to the REI meeting tonight and you will meet some other local investors. Good luck.

Victor Menasce · Answer

@Jace Prozeller, you're on the right track. If you can't afford a single family home, then buy a duplex. The math usually works.

But choosing an investment property is always about the laws of supply and demand. If lots of people are leaving town because oil development has slowed, then there will be high vacancy. You can often overcome that by offering a superior product at a market price. There is always junk in any market. You want to drive the vacancy to the junk in the market. That means having the most desirable offering in the market, without necessarily over-improving and spending too much. It's a delicate balance.

Mike Coleman · Answer

Hi Jace!

Speaking as an investor in the local market, prices are still inflated, both for purchasing and for leasing. No one knows how long until the next oil boom, but historical data suggests it is a 10 - 20 year cycle. Find a property, do your homework, and make sure you can still survive when rents return to normal and you'll be fine.

Good luck!

Mike

Loren Davy · Answer

April 21 at 6:45 is the next Real Estate Investors meeting and will be

Midland Centennial Library  2503 W Loop 250 N, Midland, TX. Everyone is welcome.

Casey Green · Answer

Hi Jace,

I am in Midland as well.  Talk to as many savvy locals as possible.  From what I can gather the market lags about 6-12 months behind the oil price.   I think it would be a great idea to go to the local REI meeting at Johnny's tonight.   It might help you get a better pulse on what is going on from folks who are knowledgeable in the area.  If you are not in a bind, I would wait a bit and see what happens in a few months.

I don't want to hijack, but when is the next meeting at the Centennial Branch Library in Midland?  (Follow my own advice so to speak)  I am excited.  I didn't know there was a local REI group.

Best of luck.

Anthony Aguillard · Answer

Hey buddy u are in my home town. Mike is a pretty accomplished investor, listen to his wisdom. There is a West Texas Investor club meeting at 6:45 this evening in Odessa at Johnny's Bar B Q, 2201 Kermit Hwy. if u have time u will be exposed to players in the business. Next month they will hold their monthly meeting at the new library on the loop off of Garfield. Good luck and do your due diligence.

Gene Hacker · Answer

I agree that one industry towns can be much more dangerous.

The oil slump might create a buying opportunity but at this point there is no way of knowing how long the slump might last and we don't know if it will get better or worse.

Generally speaking, Real Estate cycles are a bit more predictable.

Start tracking:

Inventory

# of Sales

# of NOD

# of total homes in the foreclosure process

Prices

Then you need to factor in seasonal changes in each data set.  With this information it is possible to have a bit of insight into the direction of the housing market.  When sales start increasing and inventory starts falling, then prices are soon to follow.  The downside of an oil town is that a major change in the price of oil can alter these indicators in an instant.

Tyler Flagg · Answer

@Jace Prozeller (cool name by the way) Welcome to BP! Be sure to introduce yourself in the New Member Introductions forum. Networking is half the battle...so be sure to start early.

First off, I commend you for knocking out all of your distractions. I decided to cut my cable cord about a year ago and it has paid huge dividends. It's amazing how much you can accomplish without mindless entertainment.

I definitely think that the Duplex is a great idea. Heck, if you want to, find a triplex or quadplex. Take advantage of an FHA loan on a 4 family house and, assuming that you do your math correctly, you'll be living rent free with cash flow to boot. There have been a number of articles written on this topic dubbed "House-Hacking" if you want to look it up on BP.

I'm not too familiar with the Midland market, so I won't give you any advice. However, I recommend you read this article. Figure out where Midland is within the 4 phase real estate cycle and play your cards accordingly.

Hopefully someone from your neighborhood chimes in and gives you a better idea though. Best of luck man.

Ian Wilson · Answer

Hey Jace,

I'm about in your same position but I actually have not moved to Midland yet but will be in about 20 days.

While I'm just starting my investing career as well I don't have much to offer on the Real Estate side but the reason I am moving is due to my career in O&G and (hopefully) can offer some insight on that aspect.

As far as everyone sees and knows Oil is on the rise, this may not last long however as it's mostly speculation on the increased usage of energy from driving and people generally being more active during the summer months. Some of the reason for the recent crash has been china slowing down economically in their growth and our supply has been greater than our demand. We have "tactical" reserves (really just storing it in tanks) that we fill up that are not available to the market and helps to keep the oil price high. These reserves are almost full which explained the bust in the market a few months ago and now people are speculating that the increased activity will help to deplete the reserves while companies have reduced production.

Keep in mind this is a brief overview, there are many things happening and properties of reservoirs were drilling that add into this equation. I don't necessarily buy the bounce back of oil right now and would give it some time. While that means bad for my job, I've heard many speculate they wouldn't be surprised to see oil tank in the 30's or 20's before we see a bounce back and this would spell incredibly bad news for those selling or renting properties as drilling contracts will be getting cut and people will be moving away but may be a wise buying investment if you hold off until then.

With everything there is only speculation, many have guessed oil will do the complete opposite and everything will pick up again. One thing to note about the reservoir's composition in the Permian is that oil production falls off VERY quickly and the break even price is relatively low for an unconventional play so if a company owns land they are better off drilling than trying to sell the land.

Again, this is the way I see it and my soon to be colleagues see it when we have this discussion and is by no means what will happen. Just trying to pass along some information.

Ian

Paul Miranda · Answer

I have been scouring realtor.com to keep up with housing trends and things seem to be taking a slight down turn right now.  The inventory for multi-family units is pretty low while the SFR are taking about $5k drop in prices but still pretty low.

Does anyone here have any experience of buying and holding condominiums in Midland?  I am a little hesitant to buy because of the re-sale potential.  I feel like I would get better appreciation from a SFR vs a condo and cash flow the same in this market.

Thoughts?

-Paul

Should I purchase during an oil crash?

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