All Forum Posts by: Ben S.

Thanks for all the great replies everyone! A few comments:

I probably should have defined "crash" better in the beginning. I would consider 2008 a crash in the housing market, and would call that time a depression, and the current time a recession. It's more common to lighten up these situations with nicer sounding terms (especially if you are a politician), but I think they are serious situations and should be labeled as such. I don't expect that we will collapse into chaos anytime soon, but I do expect the stock market to "crash" significantly in the coming year or two, and that that will impact the rest of the economy. I also expect other economies (Japan, China, EU, in particular) to have significant crashes as well, which will all contribute to our economic depression. 

That crash will  be a correction of over inflated markets, and will involve the real estate market too some degree, though real estate will not be the focus of it (and it will more greatly impact certain over inflated local markets). It need not last a long time, unless government intervention drags out the corrective process to prop up inefficient businesses and industries, as it has done to various degrees since 2008. Such a crash wouldn't need to be severe, if people were managing their money well and kept reserves on hand, though with the amount of total debt and negative savings the average person has, this will not be the case. 

As for government spending and debt, a trillion dollars spent by the government is not equal to a trillion dollars spent by the people. The government will blow up a chunk of that money (in war) and will inefficiently spend the rest. It's not merely money being spent that drives an economy, but money that is efficiently spent to increase production. Competition in business and individual spending in a free market leads to greater efficiency of production which results in long term economic growth. Government inflation and injection of cash provides temporary growth and creates bubbles that will eventually be corrected by the market. 

A few things to consider: China inflates and falsifies their economic statistics, as every communist nation does (and most other nations do to a lesser degree). They have severe economic problems, and though they probably won't be the first domino to fall, their crash will impact every other nation. Japan has negative interest rates, something just a few years ago economists said was impossible. They have massive debt, and are desperately trying to prop up their failing economy. Greece, Italy, and Spain, to name a few, are draining an incredible amount of money from productive nations in the EU, and along with the Brexit and immigration, may result in a crumbling of the EU. The USA has high unemployement (when including underemployment and those who have left he job market) and stagnanation across the board. Money is pouring into the stock market because there are no more safe investments (bonds and savings, which can't beat inflation anymore) for investment funds ( pension, etc) causing it to be over inflated. Numerous states and cities in America have gone bankrupt, and this will continue as they are unable to fund promises made prior to 2008. Current debt and unfunded liabilities aren't a cause for a crash, but they will be severely impacted by a crash and will lead to a worse overall economy. 

Cycles have been fairly consistent running about 7-10 years for the past several decades. I don't see any indicators that we will not continue this pattern, though with interest rates already so low, the feds will have fewer tools to try to prop up the economy in the next cycle down, leading to a worse crash than before. Gold/silver is not a long term investment, but a long term insurance policy and a short term investment in a down economy. With uncertainty not only with our own economy, but those around the world, insurance against loss of wealth is important. Cash generating residential real estate will also continue to perform to some degree, though rising taxes and dropping rental rates could significantly impact the cash flow. As some mentioned, guns also are a solid and stable investment, though less liquid than cash or gold, and possibly effected negatively by new government laws (while also being helpful in fighting off the zombies). 

I plan to continue to invest in real estate, but only with very low debt and a very high cap rate. I will also build up cash reserves in dollars and gold/silver and prepare to buy after the market drops. If it doesn't drop, then I have good cash flow from my current RE investments and a bit more from my conservative near future RE investments. If I miss out on some opportunities I won't regret it, as I don't consider that potental reward to be worth the potential risk, which is a decision we all have to make with every investment. 

@Account Closed Gold typically goes up during a down economy, look at 2000 and 2007. I'm not talking about gold as a long term investment, just to preserve and increase weath during an economic crash. 

What else would you put your money in during that time aside from real estate (something else to diversify)?

@Jay Hinrichs Good points. I definitely don't think the housing market will be as affected as 2008 overall, and I don't think the crash will be the same, but I do think my market will see a bit of a drop, and that the stock market will be the primary point of the crash, along with economies in other countries we trade with, which will cause a mess all around. That uncertaintly is what I feel fairly confident will increase the value of gold/silver and will keep rentals full. Aside from that there is a whole lot I don't know. As a real estate agent, I know a lot of people in my area buy at the max the bank will give them, and do not have savings, so a stock market crash impacting jobs could cause a lot of selling even if people aren't underwater.

@Account Closed I've thought about shorting stocks or other things (bonds), but I want to keep my finances more stable than that. Real estate, gold/silver, and even the US dollar have been fairly stable in past decades versus a lot of other investments. I'm a pretty conservative investor, and am looking stable income more than quick riches. I also know real estate really well, far better than the stock market, and feel investing in what you know best usually gives the best results. 

I have a few predictions about the economy, and am looking for the strategies of those who have a similar views. I'm not looking to discuss differing views, just if you agree with this view.

First, I believe the economy will crash in the coming 2 years (likely within 1 year). This is due to the stock market being far overvalued, the usual 8 year economic cycle, and the economies of other countries that will likely crash first and then domino around the world (China, Japan, EU). I do not expect a zombie apocalypse or any such thing, but a situation as bad overall or maybe worse than 2008. 

Due to this, I would like to both be prepared for such a crash to not lose anything, as well as be able to profit from it. 

I am currently focusing exclusively on rentals as I believe the demand will remain or grow stronger, though prices may drop a bit. I want to not only be able to live on my rental income, but have plenty of extra in case prices drop more than i expect.

Regarding debt during a crash, is there any advantage to having loans through big banks versus small banks? I don't believe interest rates will increase during this time, as the central banks will continue their strategy of lowering rates to try to help the economy. 

I want to keep a fair amount of cash reserved to cover possible extra vacancies.

For the profit side, I plan to keep some money in gold and silver, as they generally go up during a crash, and are not dependant on currency (i'm not really sure what the dollar will do during this time). I think it's too risky, but I could keep more debt on the rentals and purchase more gold/silver or have more cash on hand, as it may be harder to borrow during/after the crash.

Once the economy has stablized a bit, I want to sell the gold/silver and pool my cash to purchase more real estate at a discount, likely rentals homes, a mobile home park, or a small apartment building. I could also purchase homes with more focus on the appreciation as the market goes up again than the monthly cash flow.

@Melissa Dorman Just remember the markets that appreciate the fastest also have the most to lose in an economic downturn. Properties that have more long term stable value are less likely to drop as much in value. If you are looking at a 30 year period you may do better in the faster moving markets, but you may be under water at some point on it as well. If possible, it may be best to diversify between properties with higher cash flow with lower appreciation and those with lower cash flow but higher expected appreciation.

@Art Maydan Okay, i have seen any HUD homes like that in my area, I was assuming you were looking at average rehab, not a full gut. You would want to hire a GC at least to start on that big of a project, which means the 203k would work for you. Otherwise, I think actually managing a rehab project is invaluable and will allow you to profit more in the future, but not everyone agrees with that probably. I would find a GC and walk through one with him and get an estimate. Sometimes a project like that can cost a lot more than you think (if it's too old, and plumbing/electric/hvac needs replaced, the permits and updates can be significant).

@Art Maydan Because you will probably get the best rates and have the best financing options for owner occupied, and you will be able to closely manage value add improvements and tenants to gain the most experience and save the most money. I'm assuming you get higher ROI with multi family in Chicago, but I don't know that market, so maybe that's a bad assumption on my part. I'm also assuming the multi family house hack will have opportunity to add value (rehab/improvements).

How much are the HUD homes you are looking at? If you get a 203k then you have to hire a GC to run the rehab. You would learn a lot more if you could manage the project yourself. If you get a regular loan and can afford to rehab in cash (or cash and credit) and then refi when complete, you will learn a ton more. I have gotten two personal unsecured lines of credit for this sort of thing and they have served me well over the years. My current house hack was HUD and it has worked out well (I've been here three years, and will sell soon for about $70k profit tax free).

I would do the house hack with a multi family. I've been in and out of real estate for a long time, and am just now making a big move to be a full time investor with a lot of passive income, but I have 4 kids which makes it much much more difficult. Take advantage of the kidless time you have and house hack and build up rentals for a couple years, then when you are ready to start a family you will be in a much better position. The transition for me from full time job to full time investor, with little kids, has been painful.