Lessons Learned from Surviving the Real Estate Cycle Downturns
Growing up, I can remember my Grandfather being so conservative (at the time, I called him cheap). He had distrust for banks, never spent money on investments, passed up numerous real estate opportunities, kept cash hidden, always had “back up jobs” and died with a ton of money. He often talked about the great depression and how it impacted everyone’s life. I would say that was a lesson learned for him. He didn’t make a mistake or bad decision; it was just a cycle in the history of our country. This is also true with the 2007 real estate crash; it was caused by a number of unfortunate events. We can point fingers at a number of issues but the majority of ground level investors had no control over what was about to happen. But what lesson have we learned from this still fresh event?
We see hard money lenders putting out loans to unqualified borrowers just to get their money working and on the street. Rehabber’s and builders are paying more for houses just because they are afraid of losing a deal and are counting on the house to appreciate while they are rehabbing or building it. New fix and flip investors are throwing caution to the wind and over bidding on houses just to get any deal under their belt. Investors without cash to put down or in their bank accounts are using credit cards to supply a down payment and to pay for their rehab. Homeowners, who want to get in on the HGTV flip scene, are using lines of credit on their primary homes in order to dabble in real estate. Contractors are taking on jobs they know they can’t get to in a timely manner and hiring sub-contractors that have no experience or poor reputations just to keep up with the demand. This list goes on and on.
Our market is doing well and we should be making hay while the sun shines but we need to remain calm and conservative. The formulas we use to lend money is the same as it has been for the last 15 years and I know it is the same for investors that have been investing since the 1970’s when the consumer mortgage interest rate was over 18%.
Good times and bad, formulas should not change. Margins are the basis of your profit, no matter the expense.
If you have to borrow on lines of credit or credit cards to invest, in addition to borrowing money to do the rehab or build, then you are not in a position to invest at this time. If you don’t have the right sub-contractors to do an acceptable job the first time then you should not be taking on another job until you do. If you are paying more for the house than you should based on the 70% LTV all in formula and counting on the appreciation to pull you out, then you should wait on the next deal. If you are paying too much for the house just to get a deal, then you should consider expanding your market area or try new search strategies.
Lessons are only lessons if we take heed and avoid the pitfalls!