Author Topic: Strategies for Buying Real Estate during Recession  (Read 4111 times)

Tdub

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Strategies for Buying Real Estate during Recession
« on: June 21, 2017, 04:09:12 PM »
MMM's post today got me thinking:

Assuming we have an economic downturn sometime in the next few years, I'll want to buy up some multi-family rental properties while they're on sale.  It's not a city where we live currently, but we own a fourplex there already and plan to move there in the coming years, probably not completely FI but with a sizable stash supplemented with lower paying (but more enjoyable) jobs.  Ideally we'd move after the recession bottoms out.

My question is how to strategize starting now so I don't sell my funds and realize huge investment losses during rock bottom in order to gather cash for a down payment.  I'll still have a stable engineering paycheck coming in, and I'd expect the down payment plus closing costs to be around 100k.

Here's what I thought of so far:

Strategy 1: Start putting all my paychecks into a money market fund or bond funds.  Use for downpayment on rental property when recession hits.
Associated Risk: This is basically trying to time the market.  The recession will not necessarily happen in the next 2 years, and if it's farther out, I will have lost out on big gains that I'd have if I stuck with dollar cost averaging.

Strategy 2: Continue to dollar cost average primarily in index funds (invest in set intervals regardless of market performance and speculation).  Sell during recession to fund down payments.
Associated Risk: Selling at rock bottom and realizing my losses seems financially irresponsible.

Strategy 3: Continue to dollar cost average but change my allocation to be heavier on bonds and international (I'm in the US)
Associated Risk: Maybe miss out on some gains, but hopefully miss out on some losses.  Maybe the safest option?

What are your thoughts and strategies? 

Thanks in advance!

matchewed

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Re: Strategies for Buying Real Estate during Recession
« Reply #1 on: June 22, 2017, 05:21:39 AM »
If you're going to save money for real estate don't try to time the market by waiting for the recession. If you plan on saving money for real estate just start saving money for real estate regardless of future economic circumstances. I'd generally just pick a price point and market and save enough to make your desired downpayment.

FrugalFisherman10

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Re: Strategies for Buying Real Estate during Recession
« Reply #2 on: June 22, 2017, 06:58:55 AM »
Agreed with matchewed, I have been trying to beebop around my mind games for the last few years trying to save for a down payment and where to best put it and it just never sits right. It's impossible to time the market with any level of precision, so you've got to accept one of your options above (as those really cover all the basic scenarios).
Basically though, that means my answer to your question is Strategy 1:

matchewed

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Re: Strategies for Buying Real Estate during Recession
« Reply #3 on: June 22, 2017, 08:14:43 AM »
Or a third option if you're afraid of market fluctuations impacting your soldiers: a savings account.

$200k

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Re: Strategies for Buying Real Estate during Recession
« Reply #4 on: June 22, 2017, 01:15:20 PM »
Are we correct to assume that prices will adjust during the next recession?  I don't see many 1% properties in the markets I'm looking at (though it's not that far off), but what if the recession does not produce actual deals?

I've been on the sidelines waiting for the right time to strike, but I am finding it hard to reconcile the stock market principle of "don't time the market" with the general notion that "it's not a good time to buy RE."

For example, MMM's home town, and comparable towns like it in UT.  I don't think the next recession will allow RE investors to strike in Mountain West markets at 1%. 

I hope my assumptions are wrong and we all have the buying opportunity.


Bobberth

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Re: Strategies for Buying Real Estate during Recession
« Reply #5 on: June 22, 2017, 03:42:15 PM »
Along with savings, what about setting up Lines Of Credits (LOC) so you're ready to buy when something good comes to market? This could be a HELOC on your current house or a LOC on your investment property. Banks can cancel/refuse draws in bad times. That happened to some during the banking crisis. I pulled 100% of my HELOC out when things started to look bad banking-wise. I figured the interest cost was better than the loss of opportunity if the bank canceled my line during the best time to buy.

NoNonsenseLandlord

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Re: Strategies for Buying Real Estate during Recession
« Reply #6 on: June 22, 2017, 03:50:48 PM »
Cash will always be king.  Look for your own distressed properties and fix them up.  Look for divorces, deaths, foreclosures, etc. for the best deal.

clarkfan1979

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Re: Strategies for Buying Real Estate during Recession
« Reply #7 on: June 23, 2017, 11:34:22 PM »
In my opinion, during a recession, single family homes will be more undervalued than multi-family properties. When people have to tighten their purse strings, many opt out of single family homes and move into apartments. The rent on single family homes during a recession will be less desirable so many people pass. However, if you can cover the mortgage, it will appreciate more than multi-family when the economy recovers from the recession.

sequoia

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Re: Strategies for Buying Real Estate during Recession
« Reply #8 on: June 25, 2017, 02:02:54 AM »
If you're going to save money for real estate don't try to time the market by waiting for the recession. If you plan on saving money for real estate just start saving money for real estate regardless of future economic circumstances. I'd generally just pick a price point and market and save enough to make your desired downpayment.

This. Unless you can clearly see what will happen in the future, this is the best strategy imo. You can always find a good property you can make profit from (maybe not easy and take some effort to find). Maybe instead of making 2%, you making 1.5% but then a few years down the road, the value may go up, rental may go up and suddenly you are making 2%. If you do not buy, you are missing out on it.

I mean if you can see the future, forget real estate, just buy lottery. A h*** a lot less money to invest and it is pure profit :)

Another Reader

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Re: Strategies for Buying Real Estate during Recession
« Reply #9 on: June 25, 2017, 12:03:53 PM »
Cash.  Bought several properties that were short sales or foreclosures from 2009 to 2012.  Cash for all of them.  The lenders would only consider cash.  When things are really bad, loans are much more difficult to get anyway.

The real estate market is not efficient and it is easy to market time.

jeromedawg

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Re: Strategies for Buying Real Estate during Recession
« Reply #10 on: July 05, 2017, 06:25:47 PM »
Cash.  Bought several properties that were short sales or foreclosures from 2009 to 2012.  Cash for all of them.  The lenders would only consider cash.  When things are really bad, loans are much more difficult to get anyway.

The real estate market is not efficient and it is easy to market time.

Per OP's question on strategies: is this cash that you would have socked away on the side specifically in a savings account for the purpose of buying a home(s)? Or is it cash that you would have liquidated upon any sort of attempted "timing" of the market (e.g. keep all "down payment" money in the S&P 500 and, when you *think* the market might crash, liquidate and hold the cash until you see opportunities to scoop up some properties)? Depending on the area too, like in SF/Bay Area or LA/OC, all cash may be impractical or not possible for many, even during a crash no? I guess this is the dilemma for new investors looking for properties in such areas: there will always be cash-only competition along with the catch-22 (for many investors) who will strongly suggest investing locally "in your own backyard" vs out of state - problem is how do you compete with cash-only competition in your backyard if housing costs are still out of reach? Private investors/backers or other creative financing I suppose?
« Last Edit: July 05, 2017, 06:28:03 PM by jeromedawg »

Tdub

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Re: Strategies for Buying Real Estate during Recession
« Reply #11 on: July 20, 2017, 05:35:13 PM »
Cash.  Bought several properties that were short sales or foreclosures from 2009 to 2012.  Cash for all of them.  The lenders would only consider cash.  When things are really bad, loans are much more difficult to get anyway.

The real estate market is not efficient and it is easy to market time.

Per OP's question on strategies: is this cash that you would have socked away on the side specifically in a savings account for the purpose of buying a home(s)? Or is it cash that you would have liquidated upon any sort of attempted "timing" of the market (e.g. keep all "down payment" money in the S&P 500 and, when you *think* the market might crash, liquidate and hold the cash until you see opportunities to scoop up some properties)? Depending on the area too, like in SF/Bay Area or LA/OC, all cash may be impractical or not possible for many, even during a crash no? I guess this is the dilemma for new investors looking for properties in such areas: there will always be cash-only competition along with the catch-22 (for many investors) who will strongly suggest investing locally "in your own backyard" vs out of state - problem is how do you compete with cash-only competition in your backyard if housing costs are still out of reach? Private investors/backers or other creative financing I suppose?

Exactly my question!  For everyone who jumps on deals with cash-only or a large downpayment during a recession - how and when did you take that cash out of the market (or was it never in it)?

jeromedawg

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Re: Strategies for Buying Real Estate during Recession
« Reply #12 on: July 20, 2017, 05:48:35 PM »
Cash.  Bought several properties that were short sales or foreclosures from 2009 to 2012.  Cash for all of them.  The lenders would only consider cash.  When things are really bad, loans are much more difficult to get anyway.

The real estate market is not efficient and it is easy to market time.

Per OP's question on strategies: is this cash that you would have socked away on the side specifically in a savings account for the purpose of buying a home(s)? Or is it cash that you would have liquidated upon any sort of attempted "timing" of the market (e.g. keep all "down payment" money in the S&P 500 and, when you *think* the market might crash, liquidate and hold the cash until you see opportunities to scoop up some properties)? Depending on the area too, like in SF/Bay Area or LA/OC, all cash may be impractical or not possible for many, even during a crash no? I guess this is the dilemma for new investors looking for properties in such areas: there will always be cash-only competition along with the catch-22 (for many investors) who will strongly suggest investing locally "in your own backyard" vs out of state - problem is how do you compete with cash-only competition in your backyard if housing costs are still out of reach? Private investors/backers or other creative financing I suppose?

Exactly my question!  For everyone who jumps on deals with cash-only or a large downpayment during a recession - how and when did you take that cash out of the market (or was it never in it)?

Yea... interesting how it's hard to get any answers for real estate huh? lol.... it seems like a lot of investors talking about investing locally (and in SFRs especially) in super HCOL areas are those who have socked away large taxable sums of money due to the 6-7 figure paying jobs they either hold or held before quickFIRE or cash that was invested for a really long time before being liquidated, as I alluded to.
« Last Edit: July 20, 2017, 05:54:00 PM by jeromedawg »

Another Reader

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Re: Strategies for Buying Real Estate during Recession
« Reply #13 on: July 20, 2017, 06:23:57 PM »
The average W-2 employee depends on the success of the paper asset markets to succeed.    The logical thing for that person is to pour as much money as possible as soon as possible into those markets.  Market timing is difficult, and they rely on the growth in value over time rather than waiting to buy low.  Over 20 to 30 years, that should work out well in most cases.

Business owners, including real estate portfolio owners, look at capital a bit differently.  They generally have significant cash reserves to meet the business expenses, including reserves for when the revenue decreases.  They tend not to invest in more assets unless the business can put them to productive use and achieve the desired rate of return on the purchase.  Warren Buffett says he hates cash, but he is always sitting on a lot of it, waiting for something to buy that meets his target rate of return. 

Astute investors also know how to raise money when opportunities appear.  They can find partners and lenders more readily than the W-2 employee.  If they find the opportunity, they can generally raise the capital.

Speculative investors are often people with a lot of cash burning a hole in their pocket.  This is what we see with the overseas money that has been pouring in.  When the markets turn, some of those folks will fold.  Others will hold on until the market recovers.  There will be a lot of buying opportunities in HCOL markets if and when the foreign money pulls out.  If you have cash or access to cash then, you will profit when the HCOL market recovers.