What do you do if the market/economy goes down? I understand buying a property, and charging rent, and selling it when the house has appreciated. If the economy goes down, if the market isn’t “hot” anymore… what do I do with the property? What do I do with a property that has depreciated? I understand that is unlikely, but I would be a lot more comfortable pursuing real estate if I had a plan for a depreciating market.
I am thinking you will still benefit from loan amortization even if appreciation is not all that great. Have your tenant continue to pay down your mortgage for a longer period of time if the market stalls. Anybody else agree with this?
I try and protect myself by buying the property right in the first place. They are harder to find than buying property for FMV but are out there. For Instance if you buy a property at 80% of FMV and the houses drop in value - your still safe. If you need to drop rent rates because everyone is now doing the rent to own or terms thing - your still safe. If you build a safety cushion this way, the blows are not as severe as saying buying a house at FMV and then being upside down (house worth less than you owe or paid). Other owners will be giving rent deals to their tenants to get them in and help stop the bleeding - you can do this also, but since you bought it right - the bleeding isn’t so bad or your just making a little less.
just my thoughts
I totally agree that buying the property correctly would help cusion a blow. But if the market does seem to drop slightly you may try to see if your financing source would let you refi under a interest only payment dropping your monthly mortgage payments dramatically. It will leave you with a ballon payment at the end but that can either be paid off in the sale when the market comes back or can be refi’ed itself. Also make sure your mortgage or such allows for early payoff or release so that if the market does come back strong you are allowed to sale the property and make your final ballon payment with no penalties.
Just a Thought 8)
first off, you are asking the RIGHT question. Too many people only look at the upside. I ALWAYS look at the down side too.
The key (as other have said) is get in at the right price, plus I only buy i f I see upside potential in rents. I have a philsophy of NOT being the low-price guy in the market in terms of rent. I am always investing in small (cosmetic) upgrades. Cost me a few bucks, but I do the work myself and helps me to keep tabs on the property and keep it looking fresh (I own properties that are 40-80 yrs. old). In good time, I am always upping the rent, and (I figure) i the bad times this will help to mitigate vacancy (rental market is very price/image sensitive). I’ve been doing this 7 yr and it seem to work well., but it is more time intentive than some people like. BYW, I use property mangement firm to place tenants and manage day-to-day(colect rent) since I live 80 miles away and a have full time job. Thus I deal with it when I have time, but not getting call in middle the night to fix leaking toilets.
That’s just one model of how to do business. there are many others as well.
I wouldn’t be doing too much worrying over Housing Bubble’s if I were you. The media’s overblown the potential for a Housing Bubble & just seems to be looking for something new to worry everyone since Y2K has long passed (coincidentally enough, I first started hearing about a possible Housing Bubble shortly after the Stock Market Collapse). After 5 years we cannot consider Housing Bubble Forecasters to be serious experts.
Consider this: Real estate has historically proved to be a generally appreciating asset. As such it is usually bought with the expectation of it’s future higher value. This anticipation of higher value is usually fulfilled because land offers a fixed supply to what has proved to be a continually growing demand. However, anticipation may also lower value if property rights are expected to be restricted or if the property somehow becomes less appealing to prospective buyers (extremely rare).
If you’re worried about an impending Bubble–keep an eye on estimated population growth in any given area compared to current building permits (Las Vegas may be an area we’ll see some depreciation). Additionally, when prices become too expensive in one area (say Orange County, CA) look to outlying areas to explode if demand is still high (like San Bernardino County, CA). While high prices maybe bad news for one area…nearby areas may benefit as a result (for instance: King County WA–with their building moritoriums–have created opportunity in North Pierce & Snohomish Counties).
Know your markets (or hire experts who do), and buy smart going in.