Housing collapse coming: should I sell?

Question

I have two C-class properties, no mortgage.  I paid about $120,000 for both of them.

I also have a B-class property.  Cheap mortgage, with balloon payment of $140k due in 2 years.

The B gives easy, stable, and regular income, the C's give variable income but have the occasional tenant drama.  This is not news to anyone who knows what B and C mean here.

So. I have been offered $150,000 for the two C-class properties. Their values have gone up in just a handful of years.

It is also known that the housing markets are about to collapse. Mortgage rates are 6.25%. What should I do?

My gut says to take the $150k and get something sweet when the market collapses, but my gut can be kind of an idiot sometimes.

I know times are "unprecedented" but what do you all think I should do?

Nicholas L. · Answer

@Aaron Rosenberg just to make sure I understand - you paid $120K, and could sell for $150K?  That doesn't seem like much of a gain, and you'll pay transaction costs on the sale, but maybe I am not understanding your numbers correctly.

Also... I don't know that it's at all "known" that the housing market is about to collapse.  And even if it "collapses" by 10 or 15 or 20 or 25%... so what?  What impact does that have on rental properties with fixed rate mortgages?

Really this is a very personal decision - much more personal than "is House X a good deal?"

Scott Trench · Answer

Selling and going to cash is a strategy, but it is only a good one if you are right, and you actually pull the trigger and buy low. If you decide on this course of action, I'd recommend putting a written statement into place, predicting exactly how much you think the market is going to go down by, and when you will put the cash back into real estate.

I don't think I can predict this, so I play the long, boring game. I keep buying, and dollar cost average, every year, into more real estate. Sometimes, I'll buy high, sometimes low, but over the long-term I think I will benefit from appreciation and inflation against a levered RE portfolio.

Bruce Woodruff · Answer

No one can say whether there is a crash coming, how long it will last, or how quickly we will return to a booming market. We could be stuck with inflation even higher for 10 years. Too many variables here. Point is, don't take them into consideration much, let alone be terrified of them as you seem to be.

A good deal is always a good deal....all it has to do is make you money....

Aaron Rosenberg · Answer

Thanks for the input; I do appreciate the advice.

To answer your questions: I bought these 3 years ago during the "coming crash." I've had one house for 2 years, the other for 3. For a seasoned investor like yourself to call the 25% gain decent, well, "decent" isn't bad for a very first project. It could be a lot worse in this industry

You raise a good point about losing to taxes. I was thinking of taking the $150k and investing in a better deal. Using a 1031 Exchange I could pick up a B class property that cash flows equal to or greater than the two C-classes combined, except more consistently and with less tenant drama and with more appreciation.

It hadn't crossed my mind to never invest in real estate again.  I'm not getting out of the game.  I don't want out.  I want better.  As an investor I want cash flow.  I don't like debt, and it sounds like having a mortgage is becoming a worse idea by the day.  6.25% interest is fine as long as the cash flow is decent after all the bills have been paid.  I can always refinance when the storm is over right?

So, let's recap:  I want more cash flow.  I'm not sure of the best move to get from where I am to where I want to be.  I do want to pick up another property this Summer.  Any advice there?

Jack Martin · Answer

Hey all, be careful not to react to events in the market in real time. The recent climb in interest rates have been aggressive and have occurred only over a short period of time. It is likely that rates will to continue to climb until inflation cools off. That will certainly impact real estate values AND the strength of the economy. You might argue that those need to take a breath anyway, so this could be a good thing in the short term.

With that said, who can predict whether or not the Fed will lower interest rates next year to stimulate the economy? That tool did not exist 6 months ago when the fund rate was at 0%, but fast forward to a 3-4% fund rate and that could equal a lot of stimulus...what goes up could just as easily come down.

Nobody knows when the market cycle will end, but history can teach us the greatest lessons. Do yourself a favor and look back at what has happened in the past. IMHO, the best book written on real estate cycles is by Phillip Anderson, called "The secret life of real estate and banking". Likely the best $35 you will ever spend if you intend to invest in real estate. I won't spoil the book, but essentially history tends to repeat itself over, and over, and over. And it will likely repeat itself again this time.

Meanwhile, consider the smart strategy is to own quality real estate that produces recession resistant cash flow. Along with that, be conservative with leverage and avoid loans that require a refinance event in the near term. Then when the market corrects, the worst case scenario is you have cash flow you can count on.

All the best,

Jack

Theresa Harris · Answer

If you bought the pair for $120K 3 years ago and can get $150K and they can be problematic, I'd sell and use the money to get a better rental.  You've done it once before, so do it again.  Also you have a buyer lined up, so will save on realtor's fees.

Dave Skow · Answer

@Aaron Rosenberg- I would second  your  gut instinct  -   selling the C  properties  will allow you to  simplify  and hopefully  improve your  life  and portfolio

Aaron Rosenberg · Answer

@Ali Boone I'm not terribly worried about the balloon.  It's a 3-year mortgage and the bank plans to issue another loan rather than call in the payment in full.  I can pay the balloon when the time comes but I hope it doesn't come to that.

Cash flow is my priority.  So I'm going to take that $150 and put it where that gets me more cash flow.  Whether it's in paying off the mortgage or buying a new property depends on the properties available.  However, since inflation is so high I'd rather have a nice fixed-rate mortgage.  This new situation makes the math a lot harder.

@Ben Lin I'm selling because that was always the plan.  C-class was a low-entry cost experience builder for me but my plan was always to sell those for a more stable asset class.  I don't want more doors, I want more cash flow and more stability.

Ben Lin · Answer

Why sell?Why not add more doors?I don’t sell in good times (if I like the property or unless for exchange) and I don’t sell in bad times. I buy in high market and I buy in low market.I try to keep adding doors.

Housing collapse coming: should I sell?

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