Preparing for the next housing decline

[Bilgefisher]

From the looks of it, we are merely in the calm eye of the storm for real estate. Banks are holding onto a ton of inventory. 6.7 million homes (11%) are delinquent and the biggest set of arms are due to adjust next year. We are no way out of the woods yet.

So the question, how to prepare?

Here's a plan that I am seriously toying. Mind you I am small time investor. I am looking at selling my own home, and both of my rentals. I am then looking into placing the cash into silver until we near the bottom of the next drop.

Reason for silver is it is very undervalued. There are currently 1 billion ounces available while there is 5 billion ounces of gold available. The Gold/Silver ratio has traditionally for the last 5000 years had a ratio of around 20 to 1. Only in the last 60 years has it changed. It is now currently 58/1. Also, silver has far more industrial uses then gold and is very difficult if not impossible to retrieve after use. If silver regains even 30 to 1 with gold, it would go from $17.9 per ounce to $30 an ounce. Not a far stretch. I don't expect it to drop to much either. Lots of MSM stuff shouting about the failing dollar and the value of pm's to keep the price up.

I also don't like the idea of holding my money in the failing dollar while waiting for the next bottom of the housing crisis. We all know inflation is coming, its just a matter of when. Lets pray it won't get to hyperinflation.

If housing drops even another 20% in my area, I expect many homes to sell for 40-60k in my area of concentration. This is also not a stretch, as many sold for this price last year. I would be able to pick up around 6 rental properties with the cash generated from the sale of my homes.

I do expect rents to start dropping in my area, but I don't expect them to drop to half. Currently in rougher neighborhoods a 700 sq 2/1 rents for $700-$900. Those are the same houses that will be going for 50k. With 20% down a 40k mortgage even at 8% with insurance and taxes will still be $450-500. I think I can set my self up pretty good going into the next few years.

Ok so that my rough plan I'm considering atm. Do any others have a plan to prepare for the next crunch. If so what?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[hatterasguy]

Prices are starting to trend up. Don't sell real estate low, buy more low.

Don't make financial decisions based on fear.

 

[hakrjak]

Don't let ARM resets scare you... People's payments are DROPPING and the news media is not reporting this. I have multiple ARMS that have reset that are now in the 2%'s!

- Hakrjak

 

[Bilgefisher]

Prices may be trending up, but thats partly due to the new home buyer tax credit. The tax credit is set to run out this year. Banks are still very stingy on loans. Homes are still overvalued based on median income and the banks are either holding back reo's or not even bothering to process foreclosures.

The reason arms are so low is the artificially low interest rate. Once the inevitable rates start to climb, so will those arm readjustment. The economy is not improving, unemployment is still climbing and the govt has done everything wrong to fix this problem.

I'm confused why anybody would think things are going to get better in the next two years? Please let me know, I want to make a educated decision and may need to look at new facts.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[rcardin]

If you have the chance to sell the rentals and make enough to double your buying power in the current market do it.........If not it is a difficult decision.

 

[hatterasguy]

I disagree, I think the economy is starting to get better. Housing prices in my area are at levels not seen since the turn of the century.


Buy low sell high. Real estate is low now. If it goes lower buy more.

 

[Bilgefisher]

If you have the chance to sell the rentals and make enough to double your buying power in the current market do it.........If not it is a difficult decision.

I'm not sure if I can double my buying power, but I do believe I can increase my cashflow by +$500 a month. I'm going to have to do some more research, but I think I'm going to prepare myself for another buying session.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[hakrjak]

I've never seen or even heard of an economy that got better without having job creation occur. All this talk of a "jobless recovery" sounds completely made up to me!

Thinking that the only place this economy has gotten better is Wall Street, and that is a total hoax...

Cheers,

- Hakrjak

 

[Bilgefisher]

It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:

13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.

7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not tracked by the MBA (55.9 million total mortgages in the U.S.). That means that 10% of all homeowners in the country are delinquent.

Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be liquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and 2011. During Q1 2005, that figure was only 1.27 million.

Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012.

More information found here The Housing Market is about to Become Even More Oversupplied

 

[Bilgefisher]

Jason,

I know you do your due diligence on about everything. What indicators are you looking at to judge the Atlanta area over the next few years?

I feel I need to do much more research before I make this decision.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[hatterasguy]

Ok here is how I see it:

1. Fundamentally real estate is a good investment. Has been forever, literaly since the begining of recorded history. Past performance doesn't always equal future results, but I think in this case it does.

2. The US will do well over the next 20 years. Long term we will do fine, I have no doubt in America and continue to beleive it will be a good investment. We may hit some bumps along the road, but we will deal with it, the overall trend will be up.

3. The US and world population for that matter is growing. So their will be a need for more housing.


So here is what I think you should do. You own a couple rentals, great! Do they cash flow? Are they in a good area? If they are quality units in a good area great, hold them for the next 40 years. Who gives a crap if they drop in value a bit at some point in the future, your still going to be way ahead. If you want to sell them, you should want to sell them because they suck. Not because you think the economy may tank in a few years. Because I can 100% guarantee you that at some point in the future, it may be 3 years or 10 years, whatever it doesn't matter the economy will tank again. It shouldn't matter.

If you made a mistake buying them and want to reinvest in better units thats one thing. Go for it. If your doing it out of fear, you would be better off not doing anything. Because right now your planning on selling low(very low), missing the high and hoping for some future low. Which is silly in real estate, more so in rentals. As long as they cash flow WGAS what its value is in 2012? You will be ahead in 2020 either way.

 

[Russ H]

I think the next few years are going to be hard to predict.

I too think we're going to see an uptick of consumer sentiment-- and when consumer confidence goes up, so does the economy.

I do think that we might have a "jobless" recovery of sorts. Growing up in Michigan, I saw this first hand in the 70s and 80s-- the rest of the country recovered, while the Detroit car industry just withered and struggled. I met guys on a regular basis who had been out of work for YEARS. As union members, they were taken care of (not sure how-- never did really look into this). But I remember meeting a union steel worker who had been out of work for FIFTEEN YEARS. He was still wating for "steel to come back".

I remember thinking, "Whoa. If you haven't been able to get a job in 15 years, what makes you think things will change?"

In my eyes, he needed to change himself-- not expect the world around him to change back to his glory days.

I think the new "jobless recovery" is less geocentric-- it's all over the US (mostly on the coasts, though-- America's heartland still has pretty decent employment). I think (hope?) America may go through much the same metamorphosis-- people need to get out of their no-where or dead industry jobs, switch to new industries and avocations. I think that's already happening w/the entrepreneurial "boom" we're seeing right now-- people are seeking new lines of work-- they're 'reinventing' themselves.

The upside of this is that a portion of the workforce will shift into other (newer) careers. Or perhaps they'll learn to shift careers on a semi-regular basis-- something I think would be very healthy for our country as a whole.

Bilge, I'm not sure if your idea has merit or not. I do think that Real Estate and mortgages are going to be a big topic of conversation in the next few years. And while this is only wishful thinking, I think that getting some kind of creative solution to what's happening w/loan defaults is the thing that will really make a difference.

I DO think that if we don't come up w/some kind of solution, things could get worse. In a catastrophic way.

But it's not in my nature to think this way. I tend to focus on positive, growth-oriented solutions and outcomes. I work on "win-win" scenarios.

Why can't the media do this? Focusing on good news, growth, and positive outcomes is something that DOES appeal to people (just look at all the movies w/happy endings).

But for some reason, conspiracies and bad news abound. "If it bleeds, it leads".

I'm not by nature a guy that casts blame, but I really do feel the popular press is a driving force in keeping people dissatisfied--and unhappy. Not happy w/their bodies, their faces, their homes, cars-- always showing others that are better/faster/stronger/younger.

If we could get the media to change its focus to positive growth, I think a lot of things would change-- for the better.

But to return to your original question, Bilge-- if we count on the media to continue pimping bad news, then where to put our money/investments?

The answer: In things that thrive on bad news.

So silver (something that goes up, like gold, when fear increases) is a good bet, from that POV.

Still, don't mind me. I'm gonna keep my rose colored glasses on, and work (not hope-- WORK) for the best.

-Russ H.

 

[kwerner]

1. Fundamentally real estate is a good investment. Has been forever, literaly since the begining of recorded history. Past performance doesn't always equal future results, but I think in this case it does.

I have to somewhat disagree with this comment. If you look at the what's happened with the real estate market in Japan around 1995 (their post-bubble RE market), it's similar to what the U.S. is experiencing right now. I don't believe our market will take as long to recover as theirs has, but it is possible for us to go through the same type of situation.

I think it's prudent for Bilge to be concerned about holding real estate rentals right now. Personally, I think a better strategy to follow right now is flipping - like JScott's business model. That way you can build up capital to invest in the "big deal" cards, rather than just collecting $100 - $200 a month cashflow off of rental properties that you're still carrying a mortgage on. Just doesn't seem like best use of your time and capital to me. But like I said, that's just my opinion.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Bilgefisher]

Good, this thread is starting to evolve like I was hoping. Hatterasguy has a point about the rentals. If they cash flow really well and look to continue to cashflow then I would hold onto them.

Unfortunately they are very thin. I'm about break even after expenses. This year has been negative so far. (not counting taxes or principle) If I can turn these properties into new found cashflow and better cashflow, then I think it is wise. While finding the right deals, I think it is important to make sure I don't lose the value of my cash. Hence silver.

I also agree with JScott. I think rental prices will drop in the next year. To many rentals and not enough renters. I have no reason to believe that what is happening to the apartment market will not happen to SFR. Its a matter of time. If rents drop, I will lose money. Right now if I sell my props, I will have about 60k. This is after closing costs, repairs, and RE commissions, etc. I can put that money to much better use. I have learned a lot in the past year on rentals and I know I can do much better on the next property.

I agree Russ. I hate to look at the negative side of things. But when looking at what I consider a likely continued downturn, I see that as a positive for me. I can position myself fairly well to ride the wave out of this thing.

So I am pessimistic on the short term (1-3years) prospects of the Denver housing market, but am very positive on my ability to capitalize on it. This is my plan.

I am also very curious to see how others plan on capitalizing on the market over the next few years and why.

 

[Seshiro]

Prices are starting to trend up. Don't sell real estate low, buy more low.

Don't make financial decisions based on fear.

Wow, nicely said hatter.

 

[hatterasguy]

If your cash flow is thin I'd get rid of them for better properties. Thats not a decision based on fear, its based on a solid reason.

Sounds like its time to hunt for a better property and trade up.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Runum]

The rents in my area have definitely fallen. My units are renting for about 25% less than last year. The class A, new 1 br apartments are going for $450 a month plus ut's around here.

Here is an article you might want to read Bilge.

The Associated Press: Colorado minimum wage to drop as living costs fall

 

[hatterasguy]

I'm not going to quote because a lot of the posts in this thread are long. They are also very well thought out and make some great points. I agree a with a lot of what has been said.

But in short it doesn't matter that much. A good buy is a good buy, and a quality property bought today will do well over the long term. It may get hurt value wise in the next 5-10 years, but 20 out you will be way ahead, vs not buying anything.

I'm talking about rentals now, but as long as the cash flow is good who cares? My uncle just closed on a little 3 family and paid for it with cash. His ROI after expenses is going to be about 12%. Thats fantastic, who cares if it drops in value a bit over the short term he is still getting 12% on the money he put into it today. In 20 years that ROI will be far higher. Its a great buy, you cannot lose with a property like that. Where else today are you going to get a secured 12% yearly return on $200k? No where.


As for flipping or building; I always assume a worst case when doing the numbers on a perspective lot for a spec house. If it works out better fine, my currant one is working out $50k in my favor.

But my margins are pretty good, and I'm not building with bank money so my holding costs are very low. I'll cry if the values dropped 10 even 20 percent, but I'll still make good money. Plus I can do it fast, if I really push and have a buyer lined up I can go from closing on the lot to closing on the new house in 90 days.

My point is, overall real estate in this country is still a very good investment. Just don't listen to all the negative news. Concentrate on buying good properties at good prices, and you will do well.

 

[andviv]

hatteras, you are making some very good points. How many rentals do you own today?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Brootal]

In hopes of not ruining a great thread, how will the coming downfall of commercial real estate affect residential.

Obviously all of these big business (ex: circuit city) are not paying rent on the buildings they used to be in. Is this going to negatively impact residential real estate as well or are the two not necessarily dependent on eachother?

 

[hatterasguy]

hatteras, you are making some very good points. How many rentals do you own today?

I just started this year, none yet don't have enough capital. My plan calls for me to purchase a multi next year.

I figure I need like $100k to fix it up, and put enough down to get some good cash flow. I'm about 2-3 deals and $70k short of that figure this year.

 

[andviv]

I just started this year, none yet don't have enough capital. My plan calls for me to purchase a multi next year.

I figure I need like $100k to fix it up, and put enough down to get some good cash flow. I'm about 2-3 deals and $70k short of that figure this year.

Thanks.
Are you serious? Only $100K to get a multi in your area? I would think your area is way more expensive than that...

Good luck with your current deals.

Bilge, how's the market over there these days? Average days on the market? Average rent per sq.ft. in the area where you have your rentals?

Based on what I am seeing, I too believe there is more for prices to go down, so I would focus more in the get-in/get-out process rather than trying to hold properties right now, but that may be me talking after being burned a lot by renters in my target market.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[hatterasguy]

I'm figuring $250k-$300k for a multi. My partner and I will go in with $200k, put half down and $50k to get it up to spec. Rents should be $1k-$1,400 a month per unit depending on where I buy it.

 

[Dhappy]

This is the best time to buy. People will be kicking themselves later for not buying now. I just pick up a mobile on land with a ROI of 70%

I bought two houses where I'm getting 40% ROI.

Here is the kicker,none of these deals are leveraged. I'm getting those kind of returns on all cash plays. I can,t imagine what it would be like with leverage.

BUY,BUY,BUY.

 

[Cat Man Du]

This is the best time to buy. People will be kicking themselves later for not buying now. I just pick up a mobile on land with a ROI of 70%

I bought two houses where I'm getting 40% ROI.

Here is the kicker,none of these deals are leveraged. I'm getting those kind of returns on all cash plays. I can,t imagine what it would be like with leverage.

BUY,BUY,BUY.

Amen Bro ! Just sold 2 flips that were only a month apart from purchase to closing. There has not been a better time to move into the market.:smx6:

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[andviv]

Amen Bro ! Just sold 2 flips that were only a month apart from purchase to closing. There has not been a better time to move into the market.:smx6:

How are you selling the properties? through MLS (regular listings) or any other special way like wholesaling or having a buyers' list?

 

[Bilgefisher]

Bilge, how's the market over there these days? Average days on the market? Average rent per sq.ft. in the area where you have your rentals?

Based on what I am seeing, I too believe there is more for prices to go down, so I would focus more in the get-in/get-out process rather than trying to hold properties right now, but that may be me talking after being burned a lot by renters in my target market.

Its hard to say rent per sq foot. Its really not working that way in my areas of concentration. To give you an idea, my 750 sq ft 2/1 vinyl siding rents for $900 while my 1700 sq ft 4/2 brick rents for $1100. Both are subpar areas of 3 on a 10 point scale. It is taking around 6 weeks to rent a home and time on market for sale homes is 6-12 months.

My concern with rents is the number of rentals entering the market that were picked up dirt cheap. A $1000/mo rental picked up for 65k has room for many landlords to drop rents and compete with each other. I'm seeing for rent signs everywhere. Unfortunately I can't be sure if there are more signs or I am just aware of them more.

I'm also leaning away from larger sfr. More to damage and its harder to maintain a decent looking property. My goal is to have nice looking properties in these areas. I'm looking at 2-6 plexes right now because I can get better cashflow and I can maintain the properties to my liking with professional landscaping companies, pass the cost onto the rents without a noticeable affect on each renter.

I'm deciding whether to pursue a 3-plex in my area. 1500 sq ft with 3 1/1 units that rent for $500/mo. Asking price is 100k. There are 3 such buildings in the area. There is also a 6-plex with similar units for 180k. All on the same block. 15 units that look to cashflow nicely. New roofs, but each need furnaces and some interior updating. I simply don't have the cash to get it done. Exploring my options with private money.

 

[Russ H]

Bilge-

You may want to look for old posts here (by SteveO) and on richdad (by rusty) on why 1/1s have higher turnover and are much more work.

Not sure if you've read through lots of rusty's posts on the richdad forums, but they are perfect for what you're looking at. He was a regular contributor around 2000-2002 or so. Great, great info based on his years of experience owning lots of multifamily props (not SteveO 100-200 unit stuff-- more like duplexes-- LOTS of them).

-Russ H.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Russ H]

Here's one of his summary threads:

Rich Dad - Welcome to Rich Dad!

This was rusty's website for a while-- not sure how up to date it is:

The Lazy Mentor's Reference Journal

Have fun.

-Russ H.

 

[Cat Man Du]

How are you selling the properties? through MLS (regular listings) or any other special way like wholesaling or having a buyers' list?

Thanks for asking. I am a real estate broker myself and both found and sold the units over MLS. I have a few rentals, but these were just too good to pass up. Also, I really did pull a RDPD and did it all with none of my own money. :thankyousign: